draft banking (capital) (amendment) rules 2011 ......draft 2 banking (capital) (amendment) rules...
TRANSCRIPT
Draft
1
DRAFT BANKING (CAPITAL) (AMENDMENT)
RULES 2011
(Draft for consultation subject to further amendment)
Annex 1
Draft
2
BANKING (CAPITAL) (AMENDMENT) RULES 2011
Contents
Section
1. Commencement
2. Banking (Capital) Rules amended
3. Section 2 amended (Interpretation)
4. Section 4A added (Valuation of exposures measured at fair value)
5. Section 5 amended (Authorized institution shall only use STC approach, BSC
approach or IRB approach to calculate its credit risk for non-securitization
exposures)
6. Section 10 amended (Measures which may be taken by Monetary Authority if
authorized institution using BSC approach or IRB approach no longer satisfies
specified requirements, etc.)
7. Section 12 amended (Exemption for exposures)
8. Section 15 amended (Authorized institution shall only use STC(S) approach or
IRB(S) approach to calculate its credit risk for securitization exposures)
9. Section 17 amended (Authorized institution shall only use STM approach, IMM
approach or approach used by parent bank to calculate its market risk)
10. Repeal and substitution of section 18 (Authorized institution may apply for
approval to use IMM approach to calculate its market risk)
Draft
3
11. Section 18A added (Transitional provisions applicable to approvals granted under
section 18 as in force before commencement of Banking (Capital) (Amendment)
Rules 2011)
12. Section 19 amended (Measures which may be taken by Monetary Authority if
authorized institution using IMM approach no longer satisfies specified
requirements, etc.)
13. Section 21 (Measures which may be taken by Monetary Authority if authorized
institution using approach used by parent bank no longer satisfies specified
requirements, etc.)
14. Section 22 amended (Exemption from section 17)
15. Section 23 amended (Revocation of exemption under section 22)
16. Sections 23A (Exemption from section 18 in respect of portfolio of market risk
positions which fall within risk category) and 23B (Revocation of exemption
under section 23A) added
17. Section 24 amended (Authorized institution shall only use BIA approach, STO
approach or ASA approach to calculate its operational risk)
18. Section 26 amended (Measures which may be taken by Monetary Authority if
authorized institution using STO approach or ASA approach no longer satisfies
specified requirements, etc.)
19. Section 33 amended (Exceptions to section 27)
20. Division 7A added to Part 2 (Attachment of conditions to approvals granted under
section 6(2)(a), 8(2)(a), 18(2)(a), 20(2)(a) or 25(2)(a))
Draft
4
21. Section 34 repealed and substituted (Reviewable decisions)
22. Section 35 amended (Interpretation of Part 3)
23. Section 37 amended (Essential characteristics of core capital and supplementary
capital)
24. Section 42 amended (Supplementary capital of authorized institution)
25. Section 44 amended (Provisions supplementary to section 42(1)(b))
26. Section 48 amended (Deductions from core capital and supplementary capital)
27. Section 51 amended (Interpretation of Part 4)
28. Section 52 amended (Calculation of risk-weighted amount of exposures)
29. Section 55 amended (Sovereign exposures)
30. Section 59 amended (Bank exposures)
31. Section 60 amended (Securities firm exposures)
32. Section 61 amended (Corporate exposures)
33. Section 61A added
61A. Application of section 61
34. Section 62 amended (Collective investment scheme exposures)
35. Section 63 amended (Cash items)
36. Section 65 amended (Residential mortgage loans)
37. Section 66 amended (Other exposures which are not past due exposures)
Draft
5
38. Section 68 repealed and substituted (Credit-linked notes)
39. Section 69 amended (Application of ECAI ratings)
40. Section 72 (Provisions supplementary to section 71)
41. Repeal and substitution of section 73 (Calculation of credit equivalent amount of
other off-balance sheet exposures not specified in Table 10 or 11)
42. Section 77 amended (Recognized collateral)
43. Section 79 amended (Collateral which may be recognized for purposes of section
77(i)(i))
44. Section 80 amended (Collateral which may be recognized for purposes of section
77(i)(ii))
45. Section 82 amended (Determination of risk-weight to be allocated to recognized
collateral under simple approach)
46. Section 84 amended (Calculation of risk-weighted amount of off-balance sheet
exposures other than OTC derivative transactions or credit derivative contracts)
47. Section 85 (Calculation of risk-weighted amount of OTC derivative transactions
and credit derivative contracts)
48. Section 96 amended (Netting of repo-style transactions)
49. Section 97 amended (Use of value-at-risk model instead of Formula 9)
50. Section 98 amended (Recognized guarantees)
51. Section 99 amended (Recognized credit derivative contracts)
Draft
6
52. Section 105 amended (Interpretation of Part 5)
53. Section 109 amended (Sovereign exposures)
54. Section 116 amended (Other exposures)
55. Section 117 amended (Credit-linked notes)
56. Section 119 amended (Provisions supplementary to section 118)
57. Repeal and substitution of section 120 (Calculation of credit equivalent amount of
other off-balance sheet exposures not specified in Table 14 or 15)
58. Section 128 amended (Calculation of risk-weighted amount of off-balance sheet
exposures other than OTC derivative transactions or credit derivative contracts)
59. Section 129 amended (Calculation of risk-weighted amount of OTC derivative
transactions and credit derivative contracts)
60. Section 130 (On-balance sheet netting)
61. Section 134 amended (Capital treatment of recognized guarantees and recognized
credit derivative contracts)
62. Section 139 amended (Interpretation of Part 6)
63. Section 140A added (Calculation of exposure at default)
64. Section 146 amended (Other exposures)
65. Section 149 amended (Default of obligor)
66. Section 154 amended (Rating coverage)
67. Section 155 amended (Integrity of rating process)
Draft
7
68. Section 166 amended (Exposure at default under foundation IRB approach or
advanced IRB approach - other off-balance sheet exposures not specified in Table
11 or 20)
69. Section 175 amended (Integrity of rating process)
70. Section 178 amended (Loss given default)
71. Section 193 amended (PD/LGD approach -integrity of rating process)
72. Section 202 amended (Repo-style transactions)
73. Section 202A added (Credit-linked notes)
74. Section 211 amended (Recognized guarantees and recognized credit derivative
contracts under substitution framework for corporate, sovereign and bank
exposures under foundation IRB approach and for equity exposures under
PD/LGD approach)
75. Section 213 amended (Recognized guarantees and recognized credit derivative
contracts under double default framework)
76. Section 214 amended (Capital treatment of recognized guarantees and recognized
credit derivative contracts)
77. Section 220 amended (Calculation of expected losses and eligible provisions for
corporate, sovereign, bank and retail exposures)
78. Section 225 amended (Application of Division 13)
79. Section 226 amended (Calculation of capital floor)
80. Section 227 amended (Interpretation of Part 7)
Draft
8
81. Section 229 amended (Treatment to be accorded to securitization transaction by
originating institution)
82. Section 230A added (Criteria authorized institutions must meet to use STC(S)
approach or IRB(S) approach)
83. Section 232 amended (Provisions applicable to ECAI issue specific ratings in
addition to those applicable under Part 4)
84. Section 236 amended (Deductions from core capital and supplementary capital)
85. Section 237 amended (Determination of risk-weights)
86. Section 239 amended (Securitization positions which are in second loss tranche or
better in ABCP programmes)
87. Section 240 amended (Treatment of liquidity facilities and servicer cash advance
facilities)
88. Repeal and substitution of section 241 (Treatment of overlapping facilities and
exposures)
89. Section 242 amended (Maximum regulatory capital for originating institution)
90. Section 243 amended (Treatment of underlying exposures of originating
institution in synthetic securitization transaction)
91. Section 245 amended (Calculation of risk-weighted amount of investors’ interest
for securitization exposures of originating institution subject to early amortization
provision)
92. Section 251 amended (Deductions from core capital and supplementary capital)
Draft
9
93. Repeal and substitution of section 253 (Treatment of overlapping facilities and
exposures)
94. Section 254 amended (Maximum regulatory capital for originating institution)
95. Section 255 amended (Treatment of underlying exposures of originating
institutions in synthetic securitization transactions)
96. Section 257 amended (Calculation of risk-weighted amount of investors’ interest
for securitization exposures of originating institution subject to early amortization
provision)
97. Section 258 amended (Treatment of interest rate contracts and exchange rate
contracts)
98. Section 260A added (Reduction in risk-weighted amounts)
99. Section 262 amended (Determination of risk-weights)
100. Section 263 amended (Use of inferred ratings)
101. Section 264 amended (Calculation of risk-weighted amount of liquidity facilities)
102. Section 265 amended (Recognized credit risk mitigation)
103. Section 268A added (Reduction in risk-weighted amount)
104. Section 270 amended (Use of supervisory formula)
105. Section 271 amended (Capital charge factor for underlying exposures under IRB
approach)
106. Section 274 amended (Effective number of underlying exposures)
Draft
10
107. Section 275 amended (Exposure-weighted average LGD)
108. Section 277 amended (Calculation of risk-weighted amount of liquidity facilities)
109. Section 278 amended (Treatment of recognized credit risk mitigation—full credit
protection)
110. Section 279 amended (Treatment of recognized credit risk mitigation—partial
credit protection)
111. Section 281 amended (Interpretation of Part 8)
112. Section 283 amended (Positions to be used to calculate market risk)
113. Section 284 amended (Calculation of market risk capital charge for each risk
category)
114. Section 286 amended (Calculation of market risk capital charge)
115. Section 287 amended (Calculation of market risk capital charge for specific risk
for interest rate exposures which fall within section 286(a)(i) or (iv))
116. Sections 287A (Calculation of market risk capital charge for specific risk for
interest rate exposures which fall within section 286(a)(ii)) and 287B (Calculation
of market risk capital charge for specific risk for interest rate exposures which fall
within section 286(a)(iii)) added
117. Section 289 amended (Construction of maturity ladder)
118. Section 297 amended (Preliminary steps to calculating market risk capital charge)
119. Section 307 amended (Specific risk)
120. Section 308 amended (Use of credit derivative contracts to offset specific risk)
Draft
11
121. Section 316 amended (Positions to be used to calculate market risk)
122. Section 317 repealed and substituted (Calculation of risk-weighted amount for
market risk)
123. Sections 317A (Provisions supplementary to section 317 - calculation of market
risk capital charge for interest rate exposures), 317B (Provisions supplementary to
section 317 - calculation of market risk capital charge for equity exposures) and
317C (Provisions supplementary to section 317 - calculation of market risk capital
charge for foreign exchange (including gold) exposures)
124. Section 318 repealed and substituted (Capital treatment for trading book positions
subject to incremental risk charge or comprehensive risk charge)
125. Section 319 amended (Multiplication and scaling factors)
126. Schedule 2 amended (Minimum requirements to be satisfied for approval under
section 8 of these Rules to use IRB approach)
127. Schedule 3 amended (Minimum requirements to be satisfied for approval under
section 18 of these Rules to use IMM approach)
128. Schedule 4 amended (Minimum requirements to be satisfied for approval under
section 25 of these Rules to use STO approach or ASA approach)
129. Schedule 5 amended (Other deductions from core capital and supplementary
capital)
130. Schedule 6 amended (Credit quality grades)
Draft
12
131. Schedule 7 amended (Standard supervisory haircuts for comprehensive approach
to treatment of recognized collateral)
132. Schedule 8 amended (Credit quality grades)
133. Schedule 9 amended (Requirements to be satisfied for using section 229(1)(a) of
these Rules)
134. Schedule 10 amended (Requirements to be satisfied for using section 229(1)(b) of
these Rules)
135. Schedule 11 amended (Mapping of ECAI issue specific ratings into credit quality
grades under STC(S) approach)
136. Schedule 14 amended (Mapping of ECAI issue specific ratings into credit quality
grades under ratings-based method)
Draft
13
Banking (Capital) (Amendment) Rules 2011
(Made by the Monetary Authority under section 98A of the Banking Ordinance (Cap. 155)
after consultation with the Financial Secretary, the Banking Advisory Committee, the
Deposit-taking Companies Advisory Committee, The Hong Kong Association of Banks
and The DTC Association)
Draft
14
1. Commencement
These Rules come into operation on 1 January 2012.
Draft
15
2. Banking (Capital) Rules amended
The Banking (Capital) Rules (Cap. 155 sub. leg. L) are amended as set out in
sections 3 to 136.
Draft
16
3. Section 2 amended (Interpretation)
(1) Section 2(1), definition of comprehensive approach -
Repeal
“section 51”
Substitute
“section 51(1)”.
(2) Section 2(1), definition of credit conversion factor -
Repeal
“section 51” (wherever appearing)
Substitute
“section 51(1)”.
(3) Section 2(1) -
Repeal the definition of delivery-versus-payment basis
Substitute
“delivery-versus-payment basis ( ) -
(a) in relation to a transaction which is not a foreign exchange
transaction, means that the delivery of a thing under the
transaction and the payment for the thing occur
simultaneously;
(b) in relation to a foreign exchange transaction, means that the
transfer of all the currencies under the transaction occur
simultaneously;”.
(4) Section 2(1) -
Repeal the definition of ECAI issue specific rating
Substitute
“ECAI issue specific rating ( ) in relation to an exposure -
(a) except in sections 51, 52, 59, 60, 61, 62, 69, 74 and 79, Part
7, section 287 and Schedule 7, means a short-term credit
assessment rating or long-term credit assessment rating that
is assigned to the exposure by an ECAI, and is for the time
being neither withdrawn nor suspended by that ECAI;
(b) in section 51, has the meaning given by section 51(2);
(c) in section 52, has the meaning given by section 52(4);
(d) in sections 59, 60, 61, 74 and 79 and Part 7, means a short-
term credit assessment rating or long-term credit
assessment rating that is assigned to the exposure by an
Draft
17
ECAI within the meaning of paragraph (a), (b), (c), (d) or
(e) of the definition of external credit assessment
institution in this section, and is for the time being neither
withdrawn nor suspended by that ECAI;
(e) in section 62, has the meaning given by section 62(4);
(f) in section 69, has the meaning given by section 69(11);
(g) in section 287, has the meaning given by section 287(11);
(h) in Schedule 7, has the meaning given by section 2(g) of that
Schedule;”.
(5) Section 2(1) -
Repeal the definition of ECAI issuer rating
Substitute
“ECAI issuer rating ( ) in relation to any person (however
described) -
(a) except in sections 51, 55, 57, 59, 60, 61, 69 and 287, means
a long-term credit assessment rating that is assigned to the
person by an ECAI, and is for the time being neither
withdrawn nor suspended by that ECAI;
(b) in section 51, has the meaning given by section 51(2);
(c) in sections 55, 57, 59, 60 and 61, means a long-term credit
assessment rating that is assigned to the person by an ECAI
within the meaning of paragraph (a), (b), (c), (d) or (e) of
the definition of external credit assessment institution in
this section, and is for the time being neither withdrawn nor
suspended by that ECAI;
(d) in section 69, has the meaning given by section 69(11);
(e) in section 287, has the meaning given by section 287(11);”.
(6) Section 2(1), definition of external credit assessment institution,
paragraph (c) -
Repeal
“or”.
(7) Section 2(1), definition of external credit assessment institution, after
paragraph (d) -
Add
“(e) Japan Credit Rating Agency, Ltd.;
(f) Credit Analysis and Research Limited;
(g) CRISIL Limited; or
Draft
18
(h) ICRA Limited;”.
(8) Section 2(1), definition of first-to-default credit derivative contract,
paragraph (a) -
Repeal
“held by it”.
(9) Section 2(1) -
Repeal the definition of long-term ECAI issue specific rating
Substitute
“long-term ECAI issue specific rating ( ), in relation to an
exposure -
(a) except in sections 55, 59, 60, 61, 69 and 79(e), (i) and (j), Part 7
and Schedule 7, means an ECAI issue specific rating assigned to
the exposure by an ECAI that is a long-term credit assessment
rating;
(b) in sections 55, 59, 60, 61 and 79(e), (i) and (j) and Part 7, means an
ECAI issue specific rating assigned to the exposure by an ECAI
within the meaning of paragraph (a), (b), (c), (d) or (e) of the
definition of external credit assessment institution in this section
that is a long-term credit assessment rating;
(c) in section 69, has the meaning given by section 69(11);
(d) in Schedule 7, has the meaning given by section 2(h) of that
Schedule;”.
(10) Section 2(1), definition of main index -
Repeal
“section 51”
Substitute
“section 51(1)”.
(11) Section 2(1), definition of minimum holding period -
Repeal
“section 51”
Substitute
“section 51(1)”.
(12) Section 2(1), definition of past due exposure -
Repeal
“section 51”
Draft
19
Substitute
“section 51(1)”.
(13) Section 2(1), definition of positive current exposure -
Repeal
“section 51”
Substitute
“section 51(1)”.
(14) Section 2(1), definition of potential exposure -
Repeal
“section 51”
Substitute
“section 51(1)”.
(15) Section 2(1), definition of recognized credit risk mitigation -
Repeal
“section 51” (wherever appearing)
Substitute
“section 51(1)”.
(16) Section 2(1), definition of second-to-default credit derivative contract,
paragraph (a) -
Repeal
“held by it”.
(17) Section 2(1) -
Repeal the definition of short-term ECAI issue specific rating
Substitute
“short-term ECAI issue specific rating ( ), in relation to an
exposure -
(a) except in sections 59, 60, 61 and 79(k), (l) and (m) and Part
7, means an ECAI issue specific rating assigned to the
exposure by an ECAI that is a short-term credit assessment
rating;
(b) in sections 59, 60, 61 and 79(k), (l) and (m) and Part 7,
means an ECAI issue specific rating assigned to the
exposure by an ECAI within the meaning of paragraph (a),
(b), (c), (d) or (e) of the definition of external credit
assessment institution in this section that is a short-term
credit assessment rating;”.
Draft
20
(18) Section 2(1), definition of sovereign foreign public sector entity -
Repeal
“section 51”
Substitute
“section 51(1)”.
(19) Section 2(1), definition of standard supervisory haircut -
Repeal
“section 51”
Substitute
“section 51(1)”.
(20) Section 2(1) -
Repeal the definition of underlying exposures
Substitute
“underlying exposures ( ) -
(a) in relation to a securitization transaction, has the meaning
assigned to it by section 227(1);
(b) subject to paragraph (a), in relation to a derivative contract
(including a credit derivative contract) for the calculation of
an authorized institution’s market risk, has the meaning
assigned to underlying exposure in section 281;”.
(21) Section 2(1) -
Add in alphabetical order
“comprehensive risk charge ( ) has the meaning assigned
to it by section 281;
correlation trading portfolio ( ) has the meaning assigned
to it by section 281;
Credit Analysis and Research Limited ( ) means the
company incorporated in India under that name;
CRISIL Limited ( ) means the company incorporated in
India under that name;
ICRA Limited ( ) means the company incorporated in India
under that name;
incremental risk charge ( ) has the meaning assigned to it
by section 281;
incremental risks ( ) has the meaning assigned to it by the
definition of incremental risk charge in section 281;
Draft
21
Japan Credit Rating Agency, Ltd. ( ) means the company
incorporated in Japan under that name;
loss given default ( ) has the meaning assigned to it by
section 139(1);
mark-to-model ( ) means an approach to valuing an
exposure, or a portfolio of exposures, where the value is
benchmarked, extrapolated or calculated from an internal model
based on a set of market data;
nth
-to-default credit derivative contract ( ) has the meaning
assigned to it by section 281;
probability of default ( ) has the meaning assigned to it by
section 139(1);
Rating and Investment Information, Inc. ( ) means the
company incorporated in Japan under that name;
re-securitization exposure ( ) has the meaning assigned to
it by section 227(1);
re-securitization transaction ( ) has the meaning assigned
to it by section 227(1);
stressed VaR ( ) has the meaning assigned to it by section
281;
tranche ( ) has the meaning assigned to it by section 227(1);
valuation adjustment ( ), in relation to an exposure of an
authorized institution that is measured at fair value, means an
adjustment made in accordance with section 4A;”.
(22) Section 2(5), English text -
Repeal
“section” (wherever appearing)
Substitute
“provision”.
(23) Section 2 -
Repeal subsection (7).
Draft
22
4. Section 4A added (Valuation of exposures measured at fair value)
After section 4 -
Add
“4A. Valuation of exposures measured at fair value
(1) Where the exposures of an authorized institution are measured at
fair value, for the purposes of calculating the risk-weighted amount
of the exposures under Part 4, 5, 6, 7 or 8, the institution shall
establish and maintain valuation systems, controls and procedures
which are effective to ensure that the valuation of its exposures is
prudent and reliable.
(2) For the purposes of subsection (1), an authorized institution shall
make adjustments, where appropriate, to account for -
(a) the limitations of the valuation model or methodology and
the data used by the institution in the valuation process;
(b) the liquidity of the institution’s exposures; and
(c) other relevant factors which might reasonably be expected
to affect the prudence and reliability of the valuation of the
institution’s exposures.
(3) For the avoidance of doubt, it is hereby declared that adjustments
made by an authorized institution in accordance with this section
may exceed adjustments made by the institution in accordance
with the financial reporting standards adopted by the institution.”.
Draft
23
5. Section 5 amended (Authorized institution shall only use STC approach, BSC
approach or IRB approach to calculate its credit risk for non-securitization
exposures)
Section 5(2), English text -
Repeal
“section”
Substitute
“provision”.
Draft
24
6. Section 10 amended (Measures which may be taken by Monetary Authority
if authorized institution using BSC approach or IRB approach no longer
satisfies specified requirements, etc.)
(1) Section 10(1) -
Repeal paragraph (b)
Substitute
“(b) the Monetary Authority is satisfied that -
(i) if the institution were to make a fresh application under
section 6(1) for approval to use the BSC approach to
calculate its credit risk for non-securitization exposures, the
approval would be refused by virtue of section 6(3); or
(ii) the institution has contravened a condition attached under
section 33A(1) or (2) to its approval granted under section
6(2)(a),”.
(2) Section 10(4) -
Repeal paragraph (b)
Substitute
“(b) the Monetary Authority is satisfied that -
(i) if the institution were to make a fresh application under
section 8(1) for approval to use the IRB approach to
calculate its credit risk for non-securitization exposures, the
approval would be refused by virtue of section 8(3) (but,
insofar as Schedule 2 is concerned, only section 1 of that
Schedule shall be taken into account); or
(ii) the institution has contravened a condition attached under
section 33A(1) or (2) to its approval granted under section
8(2)(a),”.
Draft
25
7. Section 12 amended (Exemption for exposures)
Section 12(1) -
Repeal
“uses”
Substitute
“has made an application under section 8(1) to use, or which uses,”.
Draft
26
8. Section 15 amended (Authorized institution shall only use STC(S) approach
or IRB(S) approach to calculate its credit risk for securitization exposures)
(1) Section 15(1) -
Repeal paragraph (b)
Substitute
“(b) the underlying exposures in the securitization transaction are of a
class which would fall within -
(i) section 54, 108 or 142; or
(ii) the definition of securitization exposure in section 227(1),
(referred to in this section as ‘relevant class’) if the institution were
to classify those underlying exposures as if they were not
securitized through that transaction,”.
(2) Section 15(1)(c) -
Repeal
“or BSC approach”
Substitute
“, BSC approach or STC(S) approach”.
(3) Section 15(1)(d), after “IRB approach” -
Add
“or IRB(S) approach”.
(4) Section 15(2)(c) -
Repeal
“and IRB approach”
Substitute
“, IRB approach, STC(S) approach and IRB(S) approach”.
(5) Section 15(2)(d)(i) -
Repeal
“or BSC approach”
Substitute
“, BSC approach or STC(S) approach”.
(6) Section 15(2)(e), after “the IRB approach” -
Add
“or IRB(S) approach”.
(7) Section 15(4)(a)(i) -
Draft
27
Repeal
“or BSC approach”
Substitute
“, BSC approach or STC(S) approach”.
(8) Section 15(4)(a)(ii), after “the IRB approach” -
Add
“or IRB(S) approach”.
Draft
28
9. Section 17 amended (Authorized institution shall only use STM approach,
IMM approach or approach used by parent bank to calculate its market risk)
Section 17(2), English text -
Repeal
“section”
Substitute
“provision”.
Draft
29
10. Repeal and substitution of section 18 (Authorized institution may apply for
approval to use IMM approach to calculate its market risk)
Section 18 -
Repeal the section
Substitute
“18. Authorized institution may apply for approval to use IMM approach
to calculate its market risk
(1) An authorized institution may apply to the Monetary Authority for
approval to use the IMM approach to calculate its market risk.
(1A) The Monetary Authority shall not determine under subsection (2)
an application from an authorized institution -
(a) for any relevant charge specified in column 2 of Table 1A
opposite a risk category specified in column 1 of Table 1A
unless -
(i) the application is made in respect of both the VaR
and stressed VaR and covers the same positions for
that risk category; or
(ii) the application is made in respect of the stressed
VaR only, the institution has a deemed approval for
the VaR specified in column 2 of Table 1A opposite
that risk category, and that stressed VaR and that
deemed approval cover the same positions;
(b) for any relevant charge specified in column 3 of Table 1A
opposite the risk category, interest rate exposures or equity
exposures, as the case may be, specified in column 1 of
Table 1A unless -
(i) either -
(A) the application is made in respect of both the
VaR and stressed VaR and covers the same
positions for that risk category; or
(B) the application is made in respect of the
stressed VaR only, the institution has a
deemed approval for the VaR specified in
column 3 of Table 1A opposite that risk
category, and that deemed approval includes
the positions covered by that stressed VaR;
and
(ii) the institution has also made an application which
falls within paragraph (a) for that risk category and
which includes the positions covered by the
Draft
30
application which falls within subparagraph (i)
unless the institution already has the approval
concerned;
(c) in the case of interest rate exposures which fall within
paragraph (a) of the definition of incremental risk charge
in section 281 where the relevant charge is the incremental
risk charge specified in column 4 of Table 1A opposite the
risk category, interest rate exposures, specified in column 1
of Table 1A, the institution has also made -
(i) an application which falls within paragraph (a) for
that risk category and which includes the positions
covered by the application which falls within this
paragraph unless the institution already has the
approval concerned; and
(ii) an application which falls within paragraph (b)(i)
for that risk category and which includes the
positions covered by the application which falls
within this paragraph unless the institution already
has the approval concerned;
(d) in the case of interest rate exposures which fall within a
correlation trading portfolio where the relevant charge is
the comprehensive risk charge specified in column 4 of
Table 1A opposite the risk category, interest rate exposures,
specified in column 1 of Table 1A, the institution has also
made -
(i) an application which falls within paragraph (a) for
that risk category and which includes the positions
covered by the application which falls within this
paragraph unless the institution already has the
approval concerned; and
(ii) an application which falls within paragraph (b)(i)
for that risk category and which includes the
positions covered by the application which falls
within this paragraph unless the institution already
has the approval concerned;
(e) in the case of equity exposures which fall within paragraph
(b) of the definition of incremental risk charge in section
281 where the relevant charge is the incremental risk
charge specified in column 4 of Table 1A opposite the risk
category, equity exposures, specified in column 1 of Table
1A, the institution has also made -
(i) an application which falls within paragraph (a) for
that risk category and which includes the positions
Draft
31
covered by the application which falls within this
paragraph unless the institution already has the
approval concerned;
(ii) an application which falls within paragraph (b)(i)
for that risk category and which includes the
positions covered by the application which falls
within this paragraph unless the institution already
has the approval concerned; and
(iii) an application (or applications) which falls (or fall)
within paragraphs (a), (b)(i) and (c) in respect of the
risk category, interest rate exposures, specified in
column 1 of Table 1A unless the institution already
has the approval concerned.
(2) Subject to subsections (1A), (3), (5) and (8), the Monetary
Authority shall determine an application from an authorized
institution by -
(a) granting approval to the institution to use the IMM
approach to calculate all the relevant charges which fall
within a group of relevant charges to which the application
relates; or
(b) refusing to grant the approval.
(3) Without prejudice to the generality of subsection (2)(b), the
Monetary Authority shall refuse to grant approval to an authorized
institution to use the IMM approach to calculate its market risk if
any one or more of the requirements specified in Schedule 3
applicable to or in relation to the institution are not satisfied with
respect to the institution.
(4) Where an authorized institution uses the IMM approach to
calculate its market risk, the institution shall not, without the prior
consent of the Monetary Authority, make any significant change to
any internal model which is the subject of the approval granted to
the institution under subsection (2)(a).
(5) The Monetary Authority may grant an approval under subsection
(2)(a) to an authorized institution to use the IMM approach to
calculate its market risk in respect of general market risk or
specific risk, or both, for such risk categories, or such local or
overseas business of the institution, as specified in the approval,
beginning on such date, or the occurrence of such event, as
specified in the approval.
(6) Subject to sections 18A(3), 19(2)(a) and 317A, where an
authorized institution is granted an approval under subsection (2)(a)
and uses the IMM approach to calculate its market risk in respect
of general market risk or specific risk, or both, for its positions in
Draft
32
all or any risk categories or business, it shall not, in respect of
those positions, use the STM approach to calculate its market risk
except with the prior consent of the Monetary Authority.
(7) For the avoidance of doubt and subject to section 18A(3), it is
hereby declared that an authorized institution which has an
approval under subsection (2)(a) shall use the STM approach to
calculate its market risk for any risk category or business which is
not the subject of the approval.
(8) For the avoidance of doubt, it is hereby declared that where an
application falls within a combination of 2 or more paragraphs of
subsection (1A), the Monetary Authority may, for the purposes of
determining under subsection (2) the application, separately apply
each of the paragraphs concerned.
(9) In this section -
application ( ) means an application under
subsection (1);
approval ( ) means an approval under subsection
(2)(a);
deemed approval ( ) has the meaning assigned to it
by section 18A(1);
group of relevant charges ( ) in relation to an
authorized institution’s use of the IMM approach to
calculate market risk -
(a) in respect of general market risk, means the
institution’s relevant charges which fall within
paragraph (a) of subsection (1A);
(b) in respect of specific risk for interest rate exposures,
(i) for specific risk interest rate exposures
which fall within paragraph (a) of the
definition of incremental risk charge in
section 281, means the institution’s relevant
charges which fall within paragraphs (b) and
(c) of subsection (1A);
(ii) for specific risk interest rate exposures
which fall within a correlation trading
portfolio and where the institution seeks to
calculate the comprehensive risk charge for
that portfolio, means the institution’s
relevant charges which fall within
paragraphs (b) and (d) of subsection (1A);
and
Draft
33
(c) in respect of specific risk for equity exposures -
(i) subject to subparagraph (ii), means the
institution’s relevant charges which fall
within paragraph (b) of subsection (1A);
(ii) for equity exposures which fall within
paragraph (b) of the definition of
incremental risk charge in section 281 and
where the institution seeks to calculate the
incremental risk charge for those exposures,
means the institution’s relevant charges
which fall within paragraphs (b) and (e) of
subsection (1A);
relevant charge ( ) means a market risk capital
charge under the IMM approach specified in column 2, 3 or
4 of Table 1A.
TABLE 1A
MARKET RISK CAPITAL CHARGE UNDER IMM APPROACH
Risk category General market risk Specific risk
Column 1 Column 2 Column 3 Column 4
1. Interest rate
exposures
VaR
Stressed VaR
VaR
Stressed VaR
Incremental risk charge
Comprehensive risk
charge
2. Equity exposures VaR
Stressed VaR
VaR
Stressed VaR
Incremental risk charge
3. Foreign exchange
(including gold)
exposures
VaR
Stressed VaR
-
-
4. Commodity
exposures
VaR
Stressed VaR
-
-
”.
Draft
34
11. Section 18A added (Transitional provisions applicable to approvals granted
under section 18 as in force immediately before commencement of Banking
(Capital) (Amendment) Rules 2011)
After section 18 -
Add
“18A. Transitional provisions applicable to approvals granted under section
18 as in force immediately before commencement of Banking (Capital)
(Amendment) Rules 2011
(1) Subject to subsections (2) and (4), where an authorized institution
has in force, immediately before the relevant commencement, an
approval under section 18(2)(a) to use the IMM approach to
calculate the VaR for general market risk or specific risk, or both,
for any risk category or business of the institution specified in the
approval (in this section referred to as the ‘former approval’), then,
on and after the relevant commencement, the former approval shall
be deemed to be an approval granted under section 18(2)(a) to the
institution (in this section referred to as the ‘deemed approval’) to
use the IMM approach to calculate the relevant charge for any risk
category or business which is the subject of the former approval,
and the other provisions of these Rules (including the definition of
approval in section 18(9)) shall, with all necessary modifications,
apply to and in relation to the institution and its deemed approval
accordingly.
(2) The application of subsection (1) to an authorized institution shall
not affect the operation of a notice under section 19(2)(a) -
(a) given to the institution before the relevant commencement;
and
(b) in force before the relevant commencement.
(3) Where an authorized institution has a deemed approval for a
relevant charge specified in column 2 or 3 of Table 1A which is a
VaR, the institution shall, on and after the relevant commencement,
use the STM approach to calculate its market risk for any risk
category or business which is the subject of the former approval
unless and until the following applications, where applicable, have
been made under section 18(1) to the Monetary Authority and the
Monetary Authority has granted the approval concerned under
section 18(2)(a) -
(a) for a deemed approval relating to the VaR for general
market risk of any risk category or business, an application
which falls within section 18(1A)(a)(ii) in respect of the
stressed VaR for general market risk for the positions
covered in the deemed approval;
Draft
35
(b) for a deemed approval relating to the VaR for specific risk
for interest rate exposures referred to in paragraph (b)(i) of
the definition of group of relevant charges in section 18(9)
-
(i) an application which falls within section
18(1A)(a)(ii) in respect of the stressed VaR for
general market risk;
(ii) an application which falls within section
18(1A)(b)(i)(B) in respect of the stressed VaR for
specific risk; and
(iii) an application which falls within section 18(1A)(c)
in respect of the incremental risk charge,
for the applicable positions covered in the deemed approval;
(c) for a deemed approval relating to the VaR for specific risk
for interest rate exposures referred to in paragraph (b)(ii) of
the definition of group of relevant charges in section 18(9)
-
(i) an application which falls within section
18(1A)(a)(ii) in respect of the stressed VaR for
general market risk;
(ii) an application which falls within section
18(1A)(b)(i)(B) in respect of the stressed VaR for
specific risk; and
(iii) an application which falls within section 18(1A)(d)
in respect of the comprehensive risk charge,
for the applicable positions covered in the deemed approval;
(d) for a deemed approval relating to the VaR for specific risk
for interest rate exposures referred to in section 317A(1)(a)
and (b) and which the institution seeks to include in its
calculation of the VaR and stressed VaR for specific risk
for interest rate exposures in accordance with section
317A(2) -
(i) an application which falls within section
18(1A)(a)(ii) in respect of the stressed VaR for
general market risk; and
(ii) an application which falls within section
18(1A)(b)(i)(B) in respect of the stressed VaR for
specific risk,
for the applicable positions covered in the deemed approval;
Draft
36
(e) for a deemed approval relating to the VaR for specific risk
for equity exposures referred to in paragraph (c)(i) of the
definition of group of relevant charges in section 18(9) -
(i) an application which falls within section
18(1A)(a)(ii) in respect of the stressed VaR for
general market risk; and
(ii) an application which falls within section
18(1A)(b)(i)(B) in respect of the stressed VaR for
specific risk,
for the applicable positions covered in the deemed approval;
(f) for a deemed approval relating to the VaR for specific risk
for equity exposures referred to in paragraph (c)(ii) of the
definition of group of relevant charges in section 18(9) -
(i) an application which falls within section
18(1A)(a)(ii) in respect of the stressed VaR for
general market risk;
(ii) an application which falls within section
18(1A)(b)(i)(B) in respect of the stressed VaR for
specific risk; and
(iii) an application which falls within section 18(1A)(e)
in respect of the incremental risk charge,
for the applicable positions covered in the deemed approval.
(4) An authorized institution’s deemed approval shall be deemed to be
revoked -
(a) subject to paragraph (b), on [1 July 2012] unless, before
that date, the institution has obtained the Monetary
Authority’s approval under section 18(2)(a) to use the IMM
approach to calculate the applicable relevant charge or
charges referred to in subsection (3) in respect of that
deemed approval;
(b) if the institution has, before [1 July 2012], made an
application under section 18(1) for approval to use the
IMM approach to calculate the applicable relevant charge
or charges referred to in subsection (3) in respect of that
deemed approval but the application has not been -
(i) determined under section 18(2); or
(ii) finally determined under section 18(2) as read with
sections 101B to 101I of the Ordinance,
upon the final determination of the application where the
Monetary Authority has refused to grant the approval and
Draft
37
there is no further step that the institution can take to appeal
against that refusal.
(5) In this section -
relevant charge ( ) has the meaning assigned to it
by section 18(9);
relevant commencement ( ) means 1 January
2012.”.
Draft
38
12. Section 19 amended (Measures which may be taken by Monetary Authority
if authorized institution using IMM approach no longer satisfies specified
requirements, etc.)
Section 19(1) -
Repeal paragraph (b)
Substitute
“(b) the Monetary Authority is satisfied that -
(i) if the institution were to make a fresh application under
section 18(1) for approval to use the IMM approach to
calculate its market risk, the approval would be refused by
virtue of section 18(3); or
(ii) the institution has contravened a condition attached under
section 33A(1) or (2) to its approval granted under section
18(2)(a),”.
Draft
39
13. Section 21 amended (Measures which may be taken by Monetary Authority
if authorized institution using approach used by parent bank no longer
satisfies specified requirements, etc.)
(1) Section 21(1) -
Repeal paragraph (b)
Substitute
“(b) the Monetary Authority is satisfied that -
(i) if the institution were to make a fresh application under
section 20(1) for approval to use that approach to calculate
its market risk, the approval would be refused -
(A) by virtue of section 20(3); or
(B) because the entity which was the parent bank of the
institution has ceased to be the parent bank of the
institution; or
(ii) the institution has contravened a condition attached under
section 33A(1) or (2) to its approval granted under section
20(2)(a),”.
(2) Section 21(1), after “as specified in the notice” -
Add
“or, if the institution falls within paragraph (b)(ii) but does not also fall
within paragraph (b)(i), take one or more of the measures set out in
subsection (3).”.
(3) Section 21, after subsection (2) -
Add
“(3) The measures referred to in subsection (1) are that -
(a) the Monetary Authority may, by notice in writing given to
the institution, require the institution to -
(i) submit to the Monetary Authority a plan, within
such period (being a period which is reasonable in
all the circumstances of the case) as specified in the
notice, which satisfies the Monetary Authority that,
if it were implemented by the institution, the
institution would cease to fall within subsection
(1)(b)(ii) within a period which is reasonable in all
the circumstances of the case; and
(ii) implement the plan;
(b) the Monetary Authority may, by notice in writing given to
the institution, advise the institution that the Monetary
Authority is considering exercising the Monetary
Draft
40
Authority’s power under section 101 of the Ordinance to
vary the capital adequacy ratio of the institution by
increasing it;
(c) the Monetary Authority may, by notice in writing given to
the institution, require the institution to calculate its market
risk capital charge by the use of such higher multiplication
factor as specified in the notice in accordance with section
319(3); and
(d) the Monetary Authority may, by notice in writing given to
the institution, require the institution to reduce its market
risk exposures in such manner, or to adopt such measures,
specified in the notice which, in the opinion of the
Monetary Authority, will cause the institution to cease to
fall within subsection (1)(b)(ii) within a period which is
reasonable in all the circumstances of the case, or will
otherwise mitigate the effect of the institution falling within
that subsection.
(4) An authorized institution shall comply with the requirements of a
notice given to it under subsection (3)(a), (c) or (d).
(5) For the avoidance of doubt, it is hereby declared that subsection
(3)(b) does not operate to prejudice the generality of the
circumstances in respect of which the Monetary Authority may
exercise the power under section 101 of the Ordinance in the case
of an authorized institution to which that subsection applies.”.
Draft
41
14. Section 22 amended (Exemption from section 17)
(1) Section 22(1) -
Repeal
“institution demonstrates to the satisfaction of the Monetary Authority”
Substitute
“Monetary Authority is satisfied”.
(2) Section 22(2)(b)(i) -
Repeal
“section 51”
Substitute
“section 51(1)”.
(3) Section 22 -
Repeal subsection (3)
Substitute
“(3) The date in relation to which an authorized institution’s market risk
positions are assessed for the purposes of subsection (1) shall be -
(a) subject to paragraphs (b) and (c), the calendar quarter end
date of each of the 4 consecutive calendar quarters of the
same calendar year;
(b) subject to paragraph (c), the calendar quarter end date of
such consecutive calendar quarters, being not more than 4
consecutive calendar quarters, as the Monetary Authority
specifies in writing given to the institution; or
(c) such date as the Monetary Authority specifies in writing
given to the institution.”.
Draft
42
15. Section 23 amended (Revocation of exemption under section 22)
Section 23(1) -
Repeal paragraph (b)
Substitute
“(b) either -
(i) the Monetary Authority is satisfied that, if the institution
were not already so exempted, the exemption would be
refused by virtue of the institution failing to satisfy the
Monetary Authority as specified in section 22(1); or
(ii) the institution has given the Monetary Authority a notice
referred to in section 22(4)(b),”.
Draft
43
16. Sections 23A (Exemption from section 18 in respect of portfolio of market
risk positions which fall within risk category) and 23B (Revocation of
exemption under section 23A) added
After section 23 but in Division 5 of Part 2 -
Add
“23A. Exemption from section 18 in respect of portfolio of market risk
positions which fall within risk category
(1) An authorized institution which has made an application under
section 18(1) to use, or which uses, the IMM approach to calculate
its market risk (referred to in this section as ‘relevant calculation’)
may apply to the Monetary Authority to have a portfolio of its
market risk positions which fall within a risk category (referred to
in this section as ‘relevant portfolio’), as specified in the
application, exempted from inclusion in the relevant calculation.
(2) The Monetary Authority shall determine an application under
subsection (1) from an authorized institution by -
(a) exempting from inclusion in the relevant calculation the
relevant portfolio if the institution demonstrates to the
satisfaction of the Monetary Authority that -
(i) it is not practicable for the institution to include the
relevant portfolio in the relevant calculation;
(ii) all the market risk positions which fall within the
relevant portfolio have identical or substantially
similar transaction characteristics; and
(iii) the exemption will not materially prejudice the
calculation of the institution’s regulatory capital for
market risk; or
(b) refusing to grant the exemption.
(3) An authorized institution to which an exemption under subsection
(2)(a) is granted shall use the STM approach to calculate its market
risk for the relevant portfolio to which the exemption relates.
(4) Where -
(a) an authorized institution is granted an exemption (referred
to in this subsection as ‘existing exemption’) under
subsection (2)(a); and
(b) the institution is at any time thereafter satisfied that if it
were to make a fresh application under subsection (1) for
an exemption (referred to in this subsection as ‘new
exemption’) in respect of the relevant portfolio to which the
Draft
44
existing exemption relates, the new exemption would be, or
may be, refused by virtue of subsection (2),
the institution shall, as soon as is practicable after it is so satisfied,
give notice in writing to the Monetary Authority of the case.
23B. Revocation of exemption under section 23A
(1) Where -
(a) an authorized institution uses the STM approach to
calculate its market risk for a relevant portfolio to which an
exemption under section 23A(2)(a) relates; and
(b) the Monetary Authority is satisfied that, if the institution
were to make a fresh application under section 23A(1) for
an exemption in respect of that portfolio, the exemption
would be refused by virtue of section 23A(2),
the Monetary Authority may take either of the measures set out in
subsection (2).
(2) The measures referred to in subsection (1) are that -
(a) the Monetary Authority may, by notice in writing given to
the institution, require the institution to -
(i) submit to the Monetary Authority a plan, within
such period (being a period which is reasonable in
all the circumstances of the case) as specified in the
notice, which satisfies the Monetary Authority that,
if it were implemented by the institution, the
institution would be able to use the IMM approach
to calculate its market risk for the relevant portfolio
within a period which is reasonable in all the
circumstances of the case; and
(ii) implement the plan; and
(b) the Monetary Authority may, by notice in writing given to
the institution, revoke the exemption on such date, or the
occurrence of such event, as specified in the notice.
(3) An authorized institution shall comply with the requirements of a
notice given to it under subsection (2)(a).
(4) For the avoidance of doubt, it is hereby declared that an authorized
institution’s compliance with a requirement referred to in
subsection (2)(a) does not prejudice the generality of the Monetary
Authority’s power under subsection (2)(b).
(5) In this section, relevant portfolio ( ) has the
meaning assigned to it by section 23A(1).”.
Draft
45
17. Section 24 amended (Authorized institution shall only use BIA approach,
STO approach or ASA approach to calculate its operational risk)
Section 24(2), English text -
Repeal
“section”
Substitute
“provision”.
Draft
46
18. Section 26 amended (Measures which may be taken by Monetary Authority
if authorized institution using STO approach or ASA approach no longer
satisfies specified requirements, etc.)
Section 26(1) -
Repeal paragraph (b)
Substitute
“(b) the Monetary Authority is satisfied that -
(i) if the institution were to make a fresh application under
section 25(1) for approval to use the STO approach or ASA
approach to calculate its operational risk, the approval
would be refused by virtue of section 25(3); or
(ii) the institution has contravened a condition attached under
section 33A(1) or (2) to its approval granted under section
25(2)(a),”.
Draft
47
19. Section 33 amended (Exceptions to section 27)
(1) Section 33(1) -
Repeal
“the exposures of that subsidiary”
Substitute
“such of the exposures of that subsidiary (which may be all those
exposures or a class thereof) specified in the application”.
(2) Section 33(2)(a), after “in the application” -
Add
“, or such of those exposures as the Monetary Authority specifies in the
approval,”.
(3) Section 33(2)(b), after “approval” -
Add
“(whether in whole or in part)”.
Draft
48
20. Division 7A added to Part 2 (Attachment of conditions to approvals granted
under section 6(2)(a), 8(2)(a), 18(2)(a), 20(2)(a) or 25(2)(a))
Part 2, after Division 7 -
Add
“Division 7A - Attachment of conditions to approvals granted under
section 6(2)(a), 8(2)(a), 18(2)(a), 20(2)(a) or 25(2)(a)
33A. Attachment of conditions to approvals granted under section
6(2)(a), 8(2)(a), 18(2)(a), 20(2)(a) or 25(2)(a)
(1) Where the Monetary Authority grants an approval under
section 6(2)(a), 8(2)(a), 18(2)(a), 20(2)(a) or 25(2)(a) to an
authorized institution, the approval may be granted subject
to such conditions, if any, as he may think proper to attach
to the approval in any particular case.
(2) Without limiting the generality of subsection (1), the
Monetary Authority may at any time, by notice in writing
served on an authorized institution in respect of which the
Monetary Authority has granted an approval under section
6(2)(a), 8(2)(a), 18(2)(a), 20(2)(a) or 25(2)(a) (whether
before, on or after the commencement of this subsection),
attach to the institution’s approval such conditions
(including attach by way of amending conditions already
attached to the approval), or cancel any conditions attached
to the approval, as he may think proper, with effect from -
(a) subject to paragraph (b), the date of service of the
notice;
(b) such later date (if any) as is specified in the notice.”.
Draft
49
21. Section 34 repealed and substituted (Reviewable decisions)
Section 34 -
Repeal the section
Substitute
“34. Reviewable decisions
(1) Subject to subsection (2), a decision made by the Monetary
Authority under section 6(2), 8(2), 18(2), 25(2) or 33A(1) or (2) is
a decision to which section 101B(1) of the Ordinance applies.
(2) Subsection (1) does not apply to any decision made by the
Monetary Authority under section 33A(1) or (2) to the extent that
the decision relates to an approval granted under section 20(2)(a)
to an authorized institution.”.
Draft
50
22. Section 35 amended (Interpretation of Part 3)
Section 35, after the definition of other regulatory capital instrument -
Add
“related company ( ), in relation to an authorized institution,
means a holding company of the institution, or a company in which
the institution or a holding company of the institution is entitled to
exercise, or control the exercise of, more than 20% of the voting
power at any general meeting of the company;”.
Draft
51
23. Section 37 (Essential characteristics of core capital and supplementary
capital)
(1) Section 37(2)(c), before “where the” -
Add
“subject to subsection (2A),”.
(2) Section 37 -
Repeal subsection (3)
Substitute
“(2A) Subsection (2)(c) does not apply to an authorized institution’s
capital items which fall within section 42(1)(g) or (h).
(3) For the avoidance of doubt, it is hereby declared that an authorized
institution shall not include in the institution’s core capital or
supplementary capital any capital instrument issued by it which is
secured or covered by a guarantee or other type of contingent
liability of the institution (or secured or covered by a guarantee or
other type of contingent liability issued by a related company of
the institution) that legally or in any other way enhances the
seniority (in terms of the order of repayment of claims) of the
holders of the instrument.”.
Draft
52
24. Section 42 amended (Supplementary capital of authorized institution)
(1) Section 42(1)(f)(ii) -
Repeal
“trading; and”
Substitute
“trading;”.
(2) Section 42(1)(f), after subparagraph (ii) -
Add
“(iia) the institution is entitled to defer the payment of dividends on the
shares where its profitability will not support such payment; and”.
Draft
53
25. Section 44 amended (Provisions supplementary to section 42(1)(b))
(1) Section 44(2) -
Repeal paragraphs (a) and (b)
Substitute
“(a) shall deduct from its core capital cumulative unrealized losses of
the institution which arise from the institution’s holdings of
available-for-sale equities and debt securities; and
(b) shall not, for the purposes of paragraph (a), set-off any impairment
losses in respect of the institution’s holdings of available-for-sale
equities and debt securities against any unrealized gains in respect
of those securities.”.
(2) Section 44 -
Repeal subsection (3).
Draft
54
26. Section 48 amended (Deductions from core capital and supplementary
capital)
(1) Section 48(1)(d) -
Repeal
“and”.
(2) Section 48(1)(e) -
Repeal the full stop
Substitute
“; and”.
(3) Section 48(1), after paragraph (e ) -
Add
“(f) the amount of any valuation adjustment made in respect of an
exposure of the institution which gives rise to a reduction in the
value of the exposure except -
(i) if that exposure is a loan, any hedged item or hedging
instrument which falls within section 38(d)(i), (ii) or (iii) or
(e)(i); or
(ii) such part of that amount which has been taken into account
in the calculation of -
(A) the amount of reserves (or that part thereof) which
falls within section 38(d) or 42(1)(b) or (c); or
(B) the amount of the institution’s -
(I) unaudited profit or loss referred to in section
38(e) in respect of its current financial year;
or
(II) profit or loss pending audit completion
referred to in section 38(e) in respect of its
immediately preceding financial year.”.
Draft
55
27. Section 51 amended (Interpretation of Part 4)
(1) Section 51 -
Renumber the section as section 51(1).
(2) Section 51(1), English text, definition of attributed risk-weight, paragraph
(b) -
Repeal
“peron”
Substitute
“person”.
(3) Section 51(1), definition of principal amount -
Repeal paragraph (a)
Substitute
“(a) in relation to an on-balance sheet exposure of an authorized
institution -
(i) if the exposure is measured at fair value, means the
value of the exposure determined in accordance
with section 4A;
(ii) if the exposure is not measured at fair value, means
the book value (including accrued interest) of the
exposure;”.
(4) After section 51(1) -
Add
“(2) In subsection (1), for the purposes of the definition of attributed
risk-weight -
ECAI issue specific rating ( ) -
(a) in relation to any debt obligation of a person that is not a
corporate incorporated in India, means a short-term credit
assessment rating or long-term credit assessment rating that
is assigned to the debt obligation by an ECAI within the
meaning of paragraph (a), (b), (c), (d) or (e) of the
definition of external credit assessment institution in
section 2(1), and is for the time being neither withdrawn
nor suspended by that ECAI; or
(b) in relation to any debt obligation of a person that is a
corporate incorporated in India, means a short-term credit
assessment rating or long-term credit assessment rating that
is assigned to the debt obligation by an ECAI, and is for the
time being neither withdrawn nor suspended by that ECAI;
Draft
56
ECAI issuer rating ( ) -
(a) in relation to a person that is not a corporate incorporated in
India, means a long-term credit assessment rating that is
assigned to the person by an ECAI within the meaning of
paragraph (a), (b), (c), (d) or (e) of the definition of
external credit assessment institution in section 2(1), and
is for the time being neither withdrawn nor suspended by
that ECAI; or
(b) in relation to a person that is a corporate incorporated in
India, means a long-term credit assessment rating that is
assigned to the person by an ECAI, and is for the time
being neither withdrawn nor suspended by that ECAI.”.
Draft
57
28. Section 52 amended (Calculation of risk-weighted amount of exposures)
After section 52(3) -
Add
“(4) In subsections (2)(c) and (3)(c) -
ECAI issue specific rating ( ) -
(a) in relation to an exposure to a person that is not a corporate
incorporated in India, means a short-term credit assessment
rating or long-term credit assessment rating that is assigned
to the exposure by an ECAI within the meaning of
paragraph (a), (b), (c), (d) or (e) of the definition of
external credit assessment institution in section 2(1), and
is for the time being neither withdrawn nor suspended by
that ECAI;
(b) in relation to an exposure to a collective investment scheme,
has the meaning given by section 62(4); or
(c) in relation to an exposure to a corporate incorporated in
India, means a short-term credit assessment rating or long-
term credit assessment rating that is assigned to the
exposure by an ECAI, and is for the time being neither
withdrawn nor suspended by that ECAI.”.
Draft
58
29. Section 55 amended (Sovereign exposures)
(1) Section 55 -
Repeal subsection (1)
Substitute
“(1) Where a sovereign has an ECAI issuer rating, or a long-term ECAI
issue specific rating assigned to a debt obligation issued or
undertaken by the sovereign, an authorized institution must map
the ECAI issuer rating or long-term ECAI issue specific rating, as
the case may be, to a scale of credit quality grades represented by
the numerals 1, 2, 3, 4, 5 and 6 in accordance with Table A in
Schedule 6.”.
(2) Section 55(3) -
Repeal
“an ECAI issue specific rating”
Substitute
“a long-term ECAI issue specific rating”.
Draft
59
30. Section 59 amended (Bank exposures)
Section 59(6), before “Table E” -
Add
“Part 1 of”.
Draft
60
31. Section 60 amended (Securities firm exposures)
Section 60(6), before “Table E” -
Add
“Part 1 of”.
Draft
61
32. Section 61 amended (Corporate exposures)
(1) Section 61(1), before “Table C” -
Add
“Part 1 of”.
(2) Section 61(3) -
Repeal
everything after “in accordance with”
Substitute
“Part 1 of Table C in Schedule 6”.
(3) Section 61(6), before “Table E” -
Add
“Part 1 of”.
(4) Section 61(7) -
Repeal
everything after “in accordance with”
Substitute
“Part 1 of Table E in Schedule 6”.
Draft
62
33. Section 61A added
After section 61 -
Add
“61A. Application of section 61
(1) Section 61 -
(a) applies to a corporate incorporated outside India; and
(b) subject to the modifications described in subsection (2),
applies to a corporate incorporated in India.
(2) The modifications mentioned in subsection (1)(b) are that -
(a) the references in section 61 to “ECAI issue specific rating”
are construed as having the meaning given by paragraph (a)
of the definition of ECAI issue specific rating in section
2(1);
(b) the references in section 61 to “ECAI issuer rating” are
construed as having the meaning given by paragraph (a) of
the definition of ECAI issuer rating in section 2(1);
(c) the references in section 61 to “long-term ECAI issue
specific rating” are construed as having the meaning given
by paragraph (a) of the definition of long-term ECAI issue
specific rating in section 2(1);
(d) the references in section 61 to “short-term ECAI issue
specific rating” are construed as having the meaning given
by paragraph (a) of the definition of short-term ECAI issue
specific rating in section 2(1);
(e) the references in section 61 to “Part 1 of Table C in
Schedule 6” are construed as “Part 1 or 2 of Table C in
Schedule 6”;
(f) the references in section 61 to “Part 1 of Table E in
Schedule 6” are construed as “Part 1 or 2 of Table E in
Schedule 6”; and
(g) the reference in section 61 to “the numerals 1, 2, 3 and 4 in
accordance with Part 1 of Table E in Schedule 6” is
construed as “the numerals 1, 2, 3 and 4 in accordance with
Part 1 of Table E in Schedule 6 and the numerals 1, 2, 3, 4
and 5 in accordance with Part 2 of that Table”.”.
Draft
63
34. Section 62 amended (Collective investment scheme exposures)
After section 62(3) -
Add
“(4) In this section -
ECAI issue specific rating ( ), means a short-term credit
assessment rating or long-term credit assessment rating -
(a) that is assigned by an ECAI within the meaning of
paragraph (a), (b), (c) or (d) of the definition of external
credit assessment institution in section 2(1) to a collective
investment scheme that only holds cash or fixed income
assets;
(b) that is assigned to the scheme by that ECAI based on the
credit quality of the cash held or the fixed income assets
held, as the case may be; and
(c) that is for the time being neither withdrawn nor suspended
by that ECAI.”.
Draft
64
35. Section 63 amended (Cash items)
Section 63 -
Repeal
“section 51” (wherever appearing)
Substitute
“section 51(1)”.
Draft
65
36. Section 65 amended (Residential mortgage loans)
Section 65(1) -
Repeal paragraph (e)
Substitute
“(e) after the loan is drawn by the borrower or purchased by the
institution, as the case may be, the loan-to-value ratio of the loan
does not exceed 100% at the time of the allocation of the risk-
weight to the loan; and”.
Draft
66
37. Section 66 amended (Other exposures which are not past due exposures)
(1) Section 66(1)(a) -
Repeal
“section 62; and”
Substitute
“section 62;”.
(2) Section 66(1)(b) -
Repeal
“is applicable).”
Substitute
“is applicable); and”.
(3) Section 66(1), after paragraph (b) -
Add
“(c) instruments which -
(i) fall within the definition of other regulatory capital
instrument in section 35; and
(ii) are not subject to deduction from an authorized institution’s
core capital and supplementary capital under section
48(2).”.
(4) Section 66(5) -
Repeal
“on-balance sheet”.
Draft
67
38. Section 68 repealed and substituted (Credit-linked notes)
Section 68 -
Repeal the section
Substitute
“68. Credit-linked notes
Where an authorized institution has an exposure in respect of a credit-
linked note held by the institution -
(a) if the note has an ECAI issue specific rating, the institution shall,
subject to paragraphs (b) and (c) -
(i) classify the exposure, in accordance with the issuer or
reference entity of the note, into that class of exposures
specified in section 54 which will result in the highest risk-
weight; and
(ii) determine the risk-weight of the note by mapping the ECAI
issue specific rating to a scale of credit quality grades
applicable to the rating in accordance with section 55, 56,
57, 58, 59, 60 or 61 or, if the note does not fall within any
ECAI ratings based portfolio (within the meaning of
section 70(8)) of the institution, by applying section 66, as
the case requires, or treat the note as not having an ECAI
issue specific rating if, for the class of exposures within
which the note falls, there is no scale of credit quality
grades applicable to the rating;
(b) if the note falls within paragraph (a) and is a past due exposure, the
institution shall determine the risk-weight of the note in
accordance with section 67;
(c) if the note falls within paragraph (a) and it -
(i) is a first-to-default, second-to-default or nth
-to-default note;
or
(ii) provides credit protection proportionately to a basket of
reference obligations,
the institution shall assign a risk-weight to the exposure, or deduct
the exposure from its core capital and supplementary capital, in
accordance with section 237 as if that exposure were a
securitization exposure;
(d) if the note does not have an ECAI issue specific rating, the
institution shall, subject to paragraph (e), allocate a risk-weight to
the exposure which is the greater of -
(i) the risk-weight attributable to the reference obligation of
the note as determined in accordance with sections 55, 56,
Draft
68
57, 58, 59, 60, 61, 62, 63, 64, 65, 66 and 67 as if the
institution had a direct exposure to the reference obligation;
and
(ii) the attributed risk-weight of the issuer of the note;
(e) if the note falls within paragraph (d) and it -
(i) is a first-to-default, second-to-default or nth-to-default note;
or
(ii) provides credit protection proportionately to a basket of
reference obligations,
the institution shall determine the risk-weight attributable to the
pool of reference obligations of the note in accordance with section
74(3)(b), (4)(b), (5) or (6), as the case requires, as if the institution
had a direct exposure to the credit default swap embedded in the
note.”.
Draft
69
39. Section 69 amended (Application of ECAI ratings)
(1) Section 69(9)(a) -
Repeal
“shall”.
(2) Section 69(9)(a) -
Repeal subparagraphs (i) and (ii)
Substitute
“(i) shall use ECAI issue specific ratings applicable to foreign currency,
if available, to the extent that the exposure is denominated in
foreign currency;
(ii) shall use ECAI issue specific ratings applicable to local currency,
if available, to the extent that the exposure is denominated in local
currency;
(iii) may use ECAI issuer ratings applicable to foreign currency, if
available, to the extent that -
(A) the exposure is denominated in local currency; and
(B) there is not available an ECAI rating applicable to local
currency;”.
(3) After section 69(9) -
Add
“(10) An authorized institution, in complying with the requirements
under subsection (3), (4), (5), (6) or (7) or section 59(8), (9) or (10),
60(8) or (9) or 61(8) or (9), must not use an ECAI issue specific
rating allocated to a debt obligation that has ceased to be
outstanding.
(11) In this section -
ECAI issue specific rating ( ) -
(a) in relation to an exposure to a sovereign, a bank, a
securities firm or a corporate incorporated outside
India, means a short-term credit assessment rating
or long-term credit assessment rating that is
assigned to the exposure by an ECAI within the
meaning of paragraph (a), (b), (c), (d) or (e) of the
definition of external credit assessment institution
in section 2(1), and is for the time being neither
withdrawn nor suspended by that ECAI;
(b) in relation to an exposure to a collective investment
scheme, has the meaning given by section 62(4); or
Draft
70
(c) in relation to an exposure to a corporate
incorporated in India, means a short-term credit
assessment rating or long-term credit assessment
rating that is assigned to the exposure by an ECAI,
and is for the time being neither withdrawn nor
suspended by that ECAI;
ECAI issuer rating ( ) -
(a) in relation to a sovereign, a bank, a securities firm
or a corporate incorporated outside India, means a
long-term credit assessment rating that is assigned
to the sovereign, bank, securities firm or corporate
by an ECAI within the meaning of paragraph (a),
(b), (c), (d) or (e) of the definition of external credit
assessment institution in section 2(1), and is for the
time being neither withdrawn nor suspended by that
ECAI; or
(b) in relation to a corporate incorporated in India,
means a long-term credit assessment rating that is
assigned to the corporate by an ECAI, and is for the
time being neither withdrawn nor suspended by that
ECAI;
long-term ECAI issue specific rating ( ) -
(a) in relation to an exposure to a sovereign, a bank, a
securities firm or a corporate incorporated outside
India, means an ECAI issue specific rating assigned
to the exposure by an ECAI within the meaning of
paragraph (a), (b), (c), (d) or (e) of the definition of
external credit assessment institution in section 2(1)
that is a long-term credit assessment rating; or
(b) in relation to an exposure to a corporate
incorporated in India, means an ECAI issue specific
rating assigned to the exposure by an ECAI that is a
long-term credit assessment rating.”.
Draft
71
40. Section 72 amended (Provisions supplementary to section 71)
(1) Section 72(e) -
Repeal the full stop and substitute a semicolon.
(2) Section 72, after paragraph (e) -
Add
“(f) in the case of an off-balance sheet exposure which is a credit
derivative contract where -
(i) the contract is a credit default swap, the institution is the
protection seller and a capital charge calculated in
accordance with section 74 has been provided in respect of
the credit risk of the reference obligation underlying the
swap; or
(ii) the institution is the protection buyer and the credit risk
mitigation effect of the contract has been recognized and
taken into account, in accordance with Divisions 9 and 10,
for the purposes of the calculation of the risk-weighted
amount of the exposure to which credit protection is
provided by the contract,
the institution shall treat the credit equivalent amount of the
exposure as zero.”.
Draft
72
41. Repeal and substitution of section 73 (Calculation of credit equivalent
amount of other off-balance sheet exposures not specified in Table 10 or 11)
Section 73 -
Repeal the section
Substitute
“73. Calculation of credit equivalent amount of other off-balance sheet
exposures not specified in Table 10 or 11
An authorized institution shall, in calculating the risk-weighted amount of
an off-balance sheet exposure which is not specified in Table 10 or 11 -
(a) subject to paragraph (c), if the exposure is not specified in Table
10 and is neither an OTC derivative transaction nor a credit
derivative contract, calculate the credit equivalent amount of the
exposure by applying a CCF of 100% in accordance with section
71(1) with all necessary modifications;
(b) subject to paragraph (c), if the exposure is an OTC derivative
transaction or credit derivative contract which is not specified in
Table 11, treat the exposure as if it falls within item 5 of Table 11
and apply the relevant CCF specified in that item in accordance
with section 71(2) with all necessary modifications;
(c) apply the CCF applicable to the exposure pursuant to Part 2 of
Schedule 1 in accordance with section 71(1) or (2), as the case
requires, with all necessary modifications.”.
Draft
73
42. Section 77 amended (Recognized collateral)
Section 77(i) -
Repeal
“(k), (l),”
Substitute
“(ja), (k), (l), (la),”.
Draft
74
43. Section 79 amended (Collateral which may be recognized for purposes of
section 77(i)(i))
(1) Section 79 -
Repeal paragraph (j)
Substitute
“(j) debt securities issued by a corporate incorporated outside India that
have a long-term ECAI issue specific rating that, if mapped to the
scale of credit quality grades in Part 1 of Table C in Schedule 6,
would result in the debt securities being assigned a credit quality
grade of 1, 2 or 3;”.
(2) After section 79(j) -
Add
“(ja) debt securities issued by a corporate incorporated in India that have
a long-term ECAI issue specific rating that, if mapped to the scale
of credit quality grades in Part 1 of Table C in Schedule 6, would
result in the debt securities being assigned a credit quality grade of
1, 2 or 3 or, if mapped to the scale of credit quality grades in Part 2
of that Table, would result in the debt securities being assigned a
credit quality grade of 1, 2, 3 or 4;”.
(3) Section 79(k), before “Table E” -
Add
“Part 1 of”.
(4) Section 79 -
Repeal paragraph (l)
Substitute
“(l) debt securities issued by a bank, a securities firm or a corporate
incorporated outside India that have a short-term ECAI issue
specific rating that, if mapped to the scale of credit quality grades
in Part 1 of Table E in Schedule 6, would result in the debt
securities being assigned a credit quality grade of 1, 2 or 3;”.
(5) After section 79(l) -
Add
“(la) debt securities issued by a corporate incorporated in India that have
a short-term ECAI issue specific rating that, if mapped to the scale
of credit quality grades in Part 1 of Table E in Schedule 6, would
result in the debt securities being assigned a credit quality grade of
1, 2 or 3 or, if mapped to the scale of credit quality grades in Part 2
of that Table, would result in the debt securities being assigned a
credit quality grade of 1, 2, 3 or 4;”.
Draft
75
(6) Section 79(m)(iii), before “Table E” -
Add
“Part 1 of”.
(7) Section 79(m)(iv), before “Table E” -
Add
“Part 1 of”.
Draft
76
44. Section 80 amended (Collateral which may be recognized for purposes of
section 77(i)(ii))
Section 80(a) -
Repeal
“(k), (l),”
Substitute
“(ja), (k), (l), (la),”.
Draft
77
45. Section 82 amended (Determination of risk-weight to be allocated to
recognized collateral under simple approach)
(1) Section 82(1) -
Repeal paragraph (a)
Substitute
“(a) subject to paragraph (b) -
(i) shall, subject to subparagraph (ii), determine the risk-
weight to be allocated to the collateral in accordance with
sections 55, 56, 57, 58, 59, 60, 61, 62, 63, 66 and 68 as if
the collateral were an on-balance sheet exposure;
(ii) if the collateral is a securitization issue, shall determine the
risk-weight to be allocated to the collateral in accordance
with section 237 as if the collateral were an on-balance
sheet exposure; and”.
(2) Section 82(4)(c) -
Repeal
“section 51”
Substitute
“section 51(1)”.
Draft
78
46. Section 84 amended (Calculation of risk-weighted amount of off-balance
sheet exposures other than OTC derivative transactions [or credit derivative
contracts])
Section 84 -
Repeal
“not an OTC derivative transaction”
Substitute
“neither an OTC derivative transaction nor a credit derivative contract”.
Draft
79
47. Section 85 amended (Calculation of risk-weighted amount of OTC derivative
transactions and credit derivative contracts)
(1) Section 85 -
Renumber the section as section 85(1).
(2) After section 85(1) -
Add
“(2) Subsection (1) shall, with all necessary modifications, apply to the
calculation of the risk-weighted amount of each of an authorized
institution’s off-balance sheet exposures which is a credit
derivative contract as it applies to the calculation of the risk-
weighted amount of each of the institution’s off-balance sheet
exposures which is an OTC derivative transaction.”.
Draft
80
48. Section 96 amended (Netting of repo-style transactions)
(1) Section 96(2)(b)(ii), after “trading book” -
Add
“where the arrangements for the provision of collateral in respect of the
transactions satisfy all the requirements of section 77 (other than the
requirements of section 77(g) and (i)(i))”.
(2) Section 96(5)(b), Chinese text -
Repeal
“賬”
Substitute
“帳”.
Draft
81
49. Section 97 amended (Use of value-at-risk model instead of Formula 9)
(1) Section 97(4) -
Repeal paragraph (c)
Substitute
“(c) the quality of the model has proved acceptable pursuant to a back-
testing of the model -
(i) using data covering at least a one-year period; and
(ii) which covers representative counterparty portfolios which
have been chosen based on the sensitivity of the portfolios
to the material risk factors and correlations to which the
institution is exposed.”.
(2) Section 97(6), Formula 10 -
Repeal
“x multiplier”.
(3) Section 97(6), Formula 10, after “as collateral;” -
Add
“and”.
(4) Section 97(6), Formula 10 -
Repeal
“business day; and”
Substitute
“business day.”.
(5) Section 97(6), Formula 10 -
Repeal
“multiplier = the relevant multiplier derived in accordance with
subsection (7) and Table 13.”.
(6) Section 97(6) -
Repeal Table 13.
(7) Section 97 -
Repeal subsections (7) and (8).
Draft
82
50. Section 98 amended (Recognized guarantees)
(1) Section 98(a)(v) -
Repeal
“or”.
(2) Section 98(a) -
Repeal paragraph (vi)
Substitute
“(vi) a corporate incorporated outside India that has an ECAI issuer
rating that, if mapped to the scale of credit quality grades in Part 1
of Table C in Schedule 6, would result in the corporate being
assigned a credit quality grade of 1 or 2; or”.
(3) After section 98(a)(vi) -
Add
“(vii) a corporate incorporated in India that has an ECAI issuer rating
that, if mapped to the scale of credit quality grades in Part 1 of
Table C in Schedule 6, would result in the corporate being
assigned a credit quality grade of 1 or 2 or, if mapped to the scale
of credit quality grades in Part 2 of that Table, would result in the
corporate being assigned a credit quality grade of 1, 2 or 3,”.
Draft
83
51. Section 99 amended (Recognized credit derivative contracts)
(1) Section 99(1)(b)(v) -
Repeal
“or”.
(2) Section 99(1)(b) -
Repeal paragraph (vi)
Substitute
“(vi) a corporate incorporated outside India that has an ECAI issuer
rating that, if mapped to the scale of credit quality grades in Part 1
of Table C in Schedule 6, would result in the corporate being
assigned a credit quality grade of 1 or 2; or”.
(3) After section 99(1)(b)(vi) -
Add
“(vii) a corporate incorporated in India that has an ECAI issuer rating
that, if mapped to the scale of credit quality grades in Part 1 of
Table C in Schedule 6, would result in the corporate being
assigned a credit quality grade of 1 or 2 or, if mapped to the scale
of credit quality grades in Part 2 of that Table, would result in the
corporate being assigned a credit quality grade of 1, 2 or 3,”.
Draft
84
52. Section 105 amended (Interpretation of Part 5)
Section 105, definition of principal amount -
Repeal paragraph (a)
Substitute
“(a) in relation to an on-balance sheet exposure of an authorized
institution -
(i) if the exposure is measured at fair value, means the value of
the exposure determined in accordance with section 4A;
(ii) if the exposure is not measured at fair value, means the
book value (including accrued interest) of the exposure;”.
Draft
85
53. Section 109 amended (Sovereign exposures)
(1) Section 109 -
Repeal subsections (5), (6), (10) and (11).
(2) Section 109(12) -
Repeal
“, (9), (10) or (11)”
Substitute
“or (9)”.
Draft
86
54. Section 116 amended (Other exposures)
(1) Section 116(1)(a) -
Repeal
“and”.
(2) Section 116(1)(b) -
Repeal
“is applicable).”.
Substitute
“is applicable); and”.
(3) Section 116(1), after paragraph (b) -
Add
“(c) instruments which -
(i) fall within the definition of other regulatory capital
instrument in section 35; and
(ii) are not subject to deduction from an authorized institution’s
core capital and supplementary capital under section
48(2).”.
(4) Section 116(5) -
Repeal
“on-balance sheet”.
Draft
87
55. Section 117 amended (Credit-linked notes)
Section 117 -
Repeal paragraph (a)
Substitute
“(a) the risk-weight attributable to -
(i) subject to subparagraph (ii), the reference obligation of the
note as determined in accordance with sections 109, 110,
111, 112, 113, 114, 115 and 116 as if the institution had a
direct exposure to the reference obligation;
(ii) if the note -
(A) is a first-to-default, second-to-default or nth
-to-
default note; or
(B) provides credit protection proportionately to a
basket of reference obligations,
the pool of reference obligations of the note as determined
in accordance with section 121(3), (4), (5) or (6), as the
case requires, as if the institution had a direct exposure to
the credit default swap embedded in the note; and”.
Draft
88
56. Section 119 amended (Provisions supplementary to section 118)
(1) Section 119(e) -
Repeal the full stop and substitute a semicolon.
(2) Section 119, after paragraph (e) -
“(f) in the case of an off-balance sheet exposure which is a credit
derivative contract where -
(i) the contract is a credit default swap, the institution is the
protection seller and a capital charge calculated in
accordance with section 121 has been provided in respect
of the credit risk of the reference obligation underlying the
swap; or
(ii) the institution is the protection buyer and the credit risk
mitigation effect of the contract has been recognized and
taken into account, in accordance with Divisions 7 and 8,
for the purposes of the calculation of the risk-weighted
amount of the exposure to which credit protection is
provided by the contract,
the institution shall treat the credit equivalent amount of that
exposure as zero.”.
Draft
89
57. Repeal and substitution of section 120 (Calculation of credit equivalent
amount of other off-balance sheet exposures not specified in Table 14 or 15)
Section 120 -
Repeal the section
Substitute
“120. Calculation of credit equivalent amount of other off-balance sheet
exposures not specified in Table 14 or 15
An authorized institution shall, in calculating the risk-weighted amount of
an off-balance sheet exposure which is not specified in Table 14 or 15 -
(a) subject to paragraph (c), if the exposure is not specified in Table
14 and is neither an OTC derivative transaction nor a credit
derivative contract, calculate the credit equivalent amount of the
exposure by applying a CCF of 100% in accordance with section
118(1) with all necessary modifications;
(b) subject to paragraph (c), if the exposure is an OTC derivative
transaction or credit derivative contract which is not specified in
Table 15, treat the exposure as if it falls within item 5 of Table 15
and apply the relevant CCF specified in that item in accordance
with section 118(2) with all necessary modifications;
(c) apply the CCF applicable to the exposure pursuant to Part 2 of
Schedule 1 in accordance with section 118(1) or (2), as the case
requires, with all necessary modifications.”.
Draft
90
58. Section 128 amended (Calculation of risk-weighted amount of off-balance
sheet exposures other than OTC derivative transactions [or credit derivative
contracts])
Section 128 -
Repeal
“not an OTC derivative transaction”
Substitute
“neither an OTC derivative transaction nor a credit derivative contract”.
Draft
91
59. Section 129 amended (Calculation of risk-weighted amount of OTC
derivative transactions [and credit derivative contracts])
(1) Section 129 -
Renumber the section as section 129(1).
(2) After section 129(1) -
Add
“(2) Subsection (1) shall, with all necessary modifications, apply to the
calculation of the risk-weighted amount of each of an authorized
institution’s off-balance sheet exposures which is a credit
derivative contract as it applies to the calculation of the risk-
weighted amount of each of the institution’s off-balance sheet
exposures which is an OTC derivative transaction.”.
Draft
92
60. Section 130 (On-balance sheet netting)
Section 130(2), English text, heading of Formula 14 -
Repeal
“EXPOSE”
Substitute
“EXPOSURE”.
Draft
93
61. Section 134 amended (Capital treatment of recognized guarantees and
recognized credit derivative contracts)
Section 134 -
Repeal subsection (3)
Substitute
“(3) Where a guarantor referred to in subsection (1) is a sovereign, then,
for the purposes of that subsection, the risk-weight attributable to
the guarantor shall be that attributable under -
(a) if the institution’s exposure covered by the guarantee
concerned is to a debt security, section 109(3), (4), (8) or
(9), as the case requires;
(b) if the institution’s exposure covered by the guarantee
concerned is not to a debt security, section 109(2) or (7), as
the case requires.”.
Draft
94
62. Section 139 amended (Interpretation of Part 6)
(1) Section 139(1) -
Repeal the definition of financial firm
Substitute
“financial firm ( ), in relation to the recognition of a
guarantee or credit derivative contract in respect of an exposure of
an authorized institution under the double default framework,
means -
(a) a bank;
(b) a securities firm;
(c) an insurance firm;
(d) a corporate incorporated outside India that has an ECAI
issuer rating that, if mapped to the scale of credit quality
grades in Part 1 of Table C in Schedule 6, would result in
the corporate being assigned a credit quality grade of 1, 2
or 3; or
(e) a corporate incorporated in India that has an ECAI issuer
rating that, if mapped to the scale of credit quality grades in
Part 1 of Table C in Schedule 6, would result in the
corporate being assigned a credit quality grade of 1, 2 or 3
or, if mapped to the scale of credit quality grades in Part 2
of that Table, would result in the corporate being assigned a
credit quality grade of 1, 2, 3 or 4,
that -
(f) has provided, in the normal course of business, credit
protection for the exposure where the credit protection
concerned is not the subject of any counter-guarantee given
by a sovereign;
(g) has had an exposure to it assigned by the institution, at the
time the credit protection was first provided, to an obligor
grade with an estimate of PD that -
(i) if mapped to the scale of credit quality grades for
banks and securities firms in Table B in Schedule 6,
would result in the entity being assigned a credit
quality grade of 1 or 2;
(ii) if mapped to the scale of credit quality grades for
corporates in Part 1 of Table C in Schedule 6,
would result in the entity being assigned a credit
quality grade of 1 or 2; or
Draft
95
(iii) if mapped to the scale of credit quality grades for
corporates incorporated in India in Part 2 of Table C
in Schedule 6, would result in the entity being
assigned a credit quality grade of 1, 2 or 3;
(h) currently has an exposure to it assigned by the institution to
an obligor grade with an estimate of PD that -
(i) if mapped to the scale of credit quality grades for
banks and securities firms in Table B in Schedule 6,
would result in the entity being assigned a credit
quality grade of 1, 2 or 3;
(ii) if mapped to the scale of credit quality grades for
corporates in Part 1 of Table C in Schedule 6,
would result in the entity being assigned a credit
quality grade of 1, 2 or 3; or
(iii) if mapped to the scale of credit quality grades for
corporates incorporated in India in Part 2 of Table C
in Schedule 6, would result in the entity being
assigned a credit quality grade of 1, 2, 3 or 4; and
(i) has not had, at any time since the credit protection was first
provided, an exposure to it assigned by the institution to an
obligor grade with an estimate of PD that -
(i) if mapped to the scale of credit quality grades for
banks and securities firms in Table B in Schedule 6
or corporates in Part 1 of Table C in Schedule 6, as
the case may be, would result in the entity being
assigned a credit quality grade of 4 or 5;
(ii) if mapped to the scale of credit quality grades for
corporates incorporated in India in Part 2 of Table C
in Schedule 6, would result in the entity being
assigned a credit quality grade of 5;”.
(2) Section 139(1), definition of principal amount -
Repeal paragraph (a)
Substitute
“(a) in relation to an on-balance sheet exposure of an authorized
institution -
(i) if the exposure is measured at fair value, means the value of
the exposure determined in accordance with section 4A;
(ii) if the exposure is not measured at fair value, means the
book value (including accrued interest) of the exposure;”.
Draft
96
63. Section 140A added (Calculation of exposure at default)
After section 140 -
Add
“140A. Calculation of exposure at default
(1) Subject to subsection (2), an authorized institution shall estimate
the EAD of exposures under this Part in accordance with section
163, 164, 165, 166, 179, 180, 181, 182, 183, 195, 196, 197, 201 or
202, as appropriate.
(2) For the purposes of subsection (1), for estimating the EAD of on-
balance sheet exposures that are measured at fair value -
(a) in respect of sections 163 and 164, a reference to “current
drawn amount” shall mean the value determined in
accordance with section 4A;
(b) in respect of section 183, an authorized institution shall
determine the EAD of an equity exposure of the institution
as the value of the equity exposure determined in
accordance with section 4A.”.
Draft
97
64. Section 146 amended (Other exposures)
(1) Section 146(1) -
Repeal
“For”
Substitute
“Subject to subsection (2), for”.
(2) Section 146 -
Repeal subsection (2)
Substitute
“(2) For the purposes of section 142(1) as read with Table 16, an
authorized institution shall classify under the IRB subclass of other
items -
(a) any of the institution’s other exposures which do not fall
within the IRB subclass of cash items; and
(b) any of the institution’s exposures which -
(i) fall within the definition of other regulatory capital
instrument in section 35; and
(ii) are not subject to deduction from the institution’s
core capital and supplementary capital under section
48(2).”.
Draft
98
65. Section 149 amended (Default of obligor)
(1) Section 149(1) -
Repeal
“For”
Substitute
“Subject to subsection (4), for”.
(2) Section 149(2) -
Repeal paragraph (a)
Substitute
“(a) subject to paragraph (b), an authorized institution -
(i) shall treat the exposure as being in default; and
(ii) may treat all other outstanding credit obligations of the
obligor to the institution (or to any member of the
consolidated group of the institution) as being in default;”.
(3) Section 149, after subsection (5) -
Add
“(5A) Subject to subsections (5B) and (5C), an authorized institution
shall treat its exposures to all individual obligors in a connected
group as being in default if -
(a) a default of an obligor (in this section referred to as the
“defaulting obligor”) in the connected group has occurred;
and
(b) the defaulting obligor has been rated substantially on the
basis of the economic or financial interdependence between
the obligors in the connected group pursuant to section
154(c) and (d).
(5B) Subject to subsection (5C), where the default referred to in
subsection (5A)(a) relates only to retail exposures, subsection (2)(b)
applies to the authorized institution with respect to the defaulting
obligor.
(5C) An authorized institution shall disregard subsection (5A) in respect
of -
(a) any obligor in the connected group that has been rated on a
basis that reflects the specific circumstances of the obligor
and without regard to any economic or financial support
available to the obligor by any other member in the
connected group; and
Draft
99
(b) any other obligor in the connected group where the
institution demonstrates, to the satisfaction of the Monetary
Authority, that -
(i) the obligor has not been rated as referred to in
subsection (5A)(b); and
(ii) disregarding subsection (5A) in respect of the
obligor -
(A) is neither imprudent nor unreasonable; and
(B) will not materially prejudice the calculation
of the institution’s regulatory capital for
credit risk.”.
(4) Section 149(9) -
Repeal the definition of prescribed default criteria
Substitute
prescribed default criteria ( ) means the criteria specified
in subsection (1);
rated ( ) means the assignment of an authorized
institution’s corporate, sovereign or bank exposures to obligor
grades using the IRB approach.”.
Draft
100
66. Section 154 amended (Rating coverage)
(1) Section 154(a) -
Repeal
“approvals; and”
Substitute
“approvals;”.
(2) Section 154(b) -
Repeal
“of the exposure.”
Substitute
“of the exposure;”.
(3) Section 154, after paragraph (b) -
Add
“(c) subject to paragraph (d), rate on an individual basis each legal
entity to which the institution is exposed; and
(d) for the purposes of paragraph (c), demonstrate, to the satisfaction
of the Monetary Authority, that its policy and practices regarding
the assignment of exposures to obligor grades in respect of
individual obligors in a connected group -
(i) are prudent and reasonable;
(ii) set out, at the least -
(A) the circumstances under which the institution may
or may not assign the same obligor grade in respect
of exposures to separate obligors in a connected
group; and
(B) the definition of a connected group of obligors for
the purposes of rating assignment; and
(iii) are applied in a consistent manner.”.
Draft
101
67. Section 155 amended (Integrity of rating process)
Section 155(e) -
Repeal subparagraphs (i) and (ii)
Substitute
“(i) identifying, documenting, reviewing and updating the
circumstances in which it is appropriate for officers of the
institution to override the inputs to, or the outputs of, the
institution’s rating system;
(ii) ensuring that such circumstances are prudent;
(iii) ensuring that all permissible overrides are approved by officers of
the institution having delegated credit authority and are applied in
a consistent manner; and
(iv) monitoring the nature and performance of such overrides following
approval.”.
Draft
102
68. Section 166 amended (Exposure at default under foundation IRB approach
or advanced IRB approach - other off-balance sheet exposures not specified
in Table 11 or 20)
Section 166 -
Repeal
Everything after and including “by applying”
Substitute
“by -
(a) subject to paragraph (c), if the exposure is not specified in
Table 20 and is neither an OTC derivative transaction nor a
credit derivative contract, applying a CCF of 100% in
accordance with section 163 or 164, as the case requires,
with all necessary modifications;
(b) subject to paragraph (c), if the exposure is an OTC
derivative transaction or credit derivative contract which is
not specified in Table 11, treating the exposure as if it falls
within item 5 of Table 11 and applying the relevant CCF
specified in that item in accordance with section 165 with
all necessary modifications;
(c) applying the CCF applicable to the exposure pursuant to
Part 2 of Schedule 1 in accordance with section 163, 164 or
165, as the case requires, with all necessary modifications.”.
Draft
103
69. Section 175 amended (Integrity of rating process)
Section 175(c) -
Repeal subparagraphs (i) and (ii)
Substitute
“(i) identifying, documenting, reviewing and updating the
circumstances in which it is appropriate for officers of the
institution to override the inputs to, or the outputs of, the
institution’s rating system;
(ii) ensuring that such circumstances are prudent;
(iii) ensuring that all permissible overrides are approved by officers of
the institution having delegated credit authority and are applied in
a consistent manner; and
(iv) monitoring the nature and performance of such overrides following
approval.”.
Draft
104
70. Section 178 amended (Loss given default)
Section 178(1) -
Repeal paragraph (c)
Substitute
“(c) subject to paragraph (d), the estimate of the LGD of a retail
exposure which falls within the IRB subclass of residential
mortgages to individuals or residential mortgages to property-
holding shell companies is not less than 10%;”.
Draft
105
71. Section 193 amended (PD/LGD approach - integrity of rating process)
Section 193(e) -
Repeal subparagraphs (i) and (ii)
Substitute
“(i) identifying, documenting, reviewing and updating the
circumstances in which it is appropriate for officers of the
institution to override the inputs to, or the outputs of, the
institution’s rating system;
(ii) ensuring that such circumstances are prudent;
(iii) ensuring that all permissible overrides are approved by officers of
the institution having delegated credit authority and are applied in
a consistent manner; and
(iv) monitoring the nature and performance of such overrides following
approval.”.
Draft
106
72. Section 202 amended (Repo-style transactions)
(1) Section 202(a) -
Repeal
“falls; and”
Substitute
“falls;”.
(2) Section 202, after paragraph (a) -
Add
“(aa) the institution shall determine, by reference to Part 8, the risk-
weight to be allocated to its exposure under a repo-style transaction
booked in the institution’s trading book, which falls within
paragraph (a) or (b) of the definition of repo-style transaction in
section 2(1), or paragraph (d) of that definition where the collateral
provided by the institution is in the form of securities; and”.
Draft
107
73. Section 202A added (Credit-linked notes)
After section 202 -
Add
“202A. Credit-linked notes
(1) Subject to subsection (2), an authorized institution which has an
exposure in respect of a credit-linked note held by the institution
shall allocate a risk-weight, as determined by the applicable risk-
weight function, to the exposure which is the greater of -
(a) the risk-weight attributable to the reference obligation or
basket of reference obligations of the note, as the case may
be, as if the institution had a direct exposure to the
reference obligation or the basket of reference obligations;
and
(b) the risk-weight attributable to the note.
(2) An authorized institution is not required to provide regulatory
capital for its exposure in respect of a credit-linked note held by
the institution in excess of the institution’s maximum liability
under the note.”.
Draft
108
74. Section 211 amended (Recognized guarantees and recognized credit
derivative contracts under substitution framework for corporate, sovereign
and bank exposures under foundation IRB approach and for equity
exposures under PD/LGD approach)
Section 211 -
Repeal subsection (2)
Substitute
“(2) For the purposes of subsection (1), sections 98(a)(vi) and (vii) and
99(1)(b)(vi) and (vii) are deemed to read as -
“(vi) a corporate incorporated outside India that -
(A) has an ECAI issuer rating that, if mapped to the
scale of credit quality grades in Part 1 of Table C in
Schedule 6, would result in the corporate being
assigned a credit quality grade of 1 or 2; or
(B) has an exposure assessed under the institution's
rating system with an estimate of PD that is
equivalent to the PD of an exposure with a credit
quality grade of 1 or 2 in Part 1 of Table C in
Schedule 6; or
(vii) a corporate incorporated in India that -
(A) has an ECAI issuer rating that, if mapped to the
scale of credit quality grades in Part 1 of Table C in
Schedule 6, would result in the corporate being
assigned a credit quality grade of 1 or 2 or, if
mapped to the scale of credit quality grades in Part
2 of that Table, would result in the corporate being
assigned a credit quality grade of 1, 2 or 3; or
(B) has an exposure assessed under the institution's
rating system with an estimate of PD that is
equivalent to the PD of an exposure with a credit
quality grade of 1 or 2 in Part 1 of Table C in
Schedule 6 or a credit quality grade of 1, 2 or 3 in
Part 2 of that Table,”.”.
Draft
109
75. Section 213 amended (Recognized guarantees and recognized credit
derivative contracts under double default framework)
Section 213(c) -
Repeal subparagraph (i)
Substitute
“(i) the first-to-default credit derivative contract up to and including
the (n-1)th
-to-default credit derivative contract (each of which is a
recognized credit derivative contract) in respect of the reference
obligations within the basket have also been entered into; or”.
Draft
110
76. Section 214 amended (Capital treatment of recognized guarantees and
recognized credit derivative contracts)
After section 214(2) -
Add
“(3) For the avoidance of doubt, it is hereby declared that -
(a) if a recognized guarantee is provided to an authorized
institution or a recognized credit derivative contract is
entered into by the institution; and
(b) the institution does not use the IRB approach to calculate
its credit risk for exposures to the guarantor or counterparty,
as the case may be,
the institution shall not take into account the credit risk mitigating
effect of the guarantee or contract, as the case may be, in
calculating, under the IRB approach, the risk-weighted amount of
the exposure which is covered by the guarantee or contract, as the
case may be.”.
Draft
111
77. Section 220 amended (Calculation of expected losses and eligible provisions
for corporate, sovereign, bank and retail exposures)
(1) Section 220(3), after “EL” -
Add
“amount”.
(2) Section 220(4), Table 22, after “EL” -
Add
“AMOUNT”.
(3) Section 220(5), after “EL” -
Add
“amount”.
Draft
112
78. Section 225 amended (Application of Division 13)
(1) Section 225(1) -
Repeal
“subsection (2)”
Substitute
“subsections (2), (3), (4) and (5)”.
(2) Section 225 -
Repeal subsection (2)
Substitute
“(2) Where an authorized institution fails to fully comply with the
provisions of this Part that are applicable to it, the Monetary
Authority may, for the purposes of mitigating the effect of that
failure, exercise, in relation to the institution, any of his powers
under subsection (5).
(3) Where the Monetary Authority is satisfied that an internal rating
system or model used by an authorized institution for the purposes
of this Part causes, or could reasonably be construed as potentially
causing, whether by itself or in conjunction with any other event,
the institution to cease to have adequate financial resources
(whether actual or contingent) for the nature and scale of its
operations, the Monetary Authority may, for the purposes of
assisting in ensuring that the institution does not cease to have
those financial resources, exercise, in relation to that institution,
any of his powers under subsection (5).
(4) Where the Monetary Authority is satisfied that there exists a
material prudential concern in respect of an authorized institution
which causes, or could reasonably be construed as potentially
causing, whether by itself or in conjunction with any other event,
the financial soundness of the institution to be put at risk in
prevailing, or likely prevailing, market conditions, the Monetary
Authority may, for the purposes of assisting in ensuring that the
financial soundness of the institution is not put at risk, exercise, in
relation to that institution, any of his powers under subsection (5).
(5) The Monetary Authority may, by notice in writing given to an
authorized institution which falls within subsection (2), (3) or (4) -
(a) extend the period for which the institution shall be subject
to this Division for such period, or until the occurrence of
such event, as specified in the notice;
Draft
113
(b) again apply this Division to the institution for such period,
or until the occurrence of such event, as specified in the
notice;
(c) specify, in that notice, an adjustment factor (but neither, in
any case, less than the adjustment factor applicable to the
institution by virtue of Table 23 as read with section 226(6)
nor exceeding 100%) which shall be used by the institution
for the purpose of calculating the capital floor in
accordance with section 226.”.
Draft
114
79. Section 226 amended (Calculation of capital floor)
Section 226(6) -
Repeal
“section 225(2)”
Substitute
“section 225(5)(c)”.
Draft
115
80. Section 227 amended (Interpretation of Part 7)
(1) Section 227(1), definition of credit equivalent amount, paragraph (a) -
Repeal
“section 51”
Substitute
“section 51(1)”.
(2) Section 227(1), definition of look-through treatment -
Repeal
“or BSC approach”
Substitute
“, BSC approach or STC(S) approach”.
(3) Section 227(1), definition of principal amount -
Repeal paragraph (a)
Substitute
“(a) in relation to an on-balance sheet exposure of an authorized
institution -
(i) in the case of the STC(S) approach -
(A) if the exposure is measured at fair value, means the
value of the exposure determined in accordance
with section 4A;
(B) if the exposure is not measured at fair value, means
the book value of the exposure;
(ii) in the case of the IRB(S) approach, means the book value
of the exposure;”.
(4) Section 227(1), definition of securitization exposure -
Repeal
“credit exposure to a securitization transaction booked in its banking
book”
Substitute
“exposure to a securitization transaction”.
(5) Section 227(1) -
Repeal the definition of underlying exposures
Substitute
“underlying exposures ( ) -
Draft
116
(a) in relation to a securitization transaction which is not a re-
securitization transaction, means one or more than one on-
balance sheet or off-balance sheet exposure in respect of
which credit risk is transferred to one or more than one
person by the originator in the transaction;
(b) in relation to a re-securitization transaction -
(i) either -
(A) means one or more than one on-balance
sheet or off-balance sheet [securitization]
exposure being re-securitized through the
transaction (including such a securitization
exposure not held by the institution); or
(B) means one or more than one on-balance
sheet or off-balance sheet securitization
exposure being re-securitized through the
transaction (including such a securitization
exposure not held by the institution) and one
or more than one non-securitization
exposure (excluding any securitization
exposure irrespective of whomsoever holds
it) being securitized through the transaction;
(ii) does not include the underlying exposures in respect
of the original securitization transaction that gave
rise to the securitization exposure referred to in
subparagraph (i)(A) or (B);”.
(6) Section 227(1) -
Add in alphabetical order
“re-securitization exposure ( ) means a securitization
exposure which is an exposure to a re-securitization transaction;
re-securitization transaction ( ) means a securitization
transaction in respect of which not less than one of the underlying
exposures of the transaction is a securitization exposure (including
such a securitization exposure not held by the institution);”.
(7) After section 227(2) -
Add
“(3) Unless otherwise expressly stated, a reference in this Part to a
securitization exposure of an authorized institution (howsoever
expressed) means a securitization exposure [booked] in the
institution’s banking book.”.
Draft
117
81. Section 229 amended (Treatment to be accorded to securitization transaction
by originating institution)
(1) Section 229(1)(a) -
Repeal
“or 6”
Substitute
“, 6 or 7”.
(2) Section 229(3) -
Repeal
“or 6”
Substitute
“, 6 or 7”.
(3) Section 229(5)(a) -
Repeal
“or 6”
Substitute
“, 6 or 7”.
Draft
118
82. Section 230A added (Criteria authorized institutions must meet to use STC(S)
approach or IRB(S) approach)
After section 230 -
Add
“230A. Criteria authorized institutions must meet to use STC(S) approach or
IRB(S) approach
An authorized institution shall have -
(a) a comprehensive understanding, on a continuous basis, of
the risk characteristics of -
(i) the institution’s securitization exposures (whether
on-balance sheet or off-balance sheet); and
(ii) the pools of underlying exposures of the
securitization transactions which gave rise to those
securitization exposures;
(b) an ability to access, on a continuous basis and in a timely
manner -
(i) in relation to a securitization transaction which is
not a re-securitization transaction, performance
information on the underlying exposures (including
issuer name and credit quality); and
(ii) in relation to a securitization transaction which is a
re-securitization transaction -
(A) performance information on the underlying
exposures (including issuer name and credit
quality); and
(B) information on the risk characteristics and
performance of the underlying exposures of
the original securitization transaction being
re-securitized through the re-securitization
transaction;
(c) a thorough understanding of each structural feature of a
securitization transaction that has the potential to materially
affect the performance of the institution’s securitization
exposures to the transaction.”.
Draft
119
83. Section 232 amended (Provisions applicable to ECAI issue specific ratings in
addition to those applicable under Part 4)
(1) Section 232, paragraph (f)(ii) -
Repeal the full stop and substitute a semicolon.
(2) Section 232, after paragraph (f) -
Add
“(g) if an ECAI issue specific rating assigned to a securitization
exposure of the institution is wholly or partly based on unfunded
support (including a liquidity facility or credit enhancement)
provided by the institution, the institution shall treat that
securitization exposure as unrated.”.
Draft
120
84. Section 236 amended (Deductions from core capital and supplementary
capital)
(1) Section 236(1)(d)(iv) -
Repeal
“facility; and”
Substitute
“facility;”.
(2) Section 236(1), after paragraph (d) -
Add
“(da) any securitization exposure of the institution in any case where the
institution is not in compliance, whether in whole or in part, with
section 230A in respect of that exposure; and”.
Draft
121
85. Section 237 amended (Determination of risk-weights)
(1) Section 237(1)(b), after “subsections (2) and (3)” -
Add
“(in the case of securitization exposures which are not re-securitization
exposures) and subsections (4) and (5) (in the case of re-securitization
exposures)”.
(2) Section 237(2), after “issue specific ratings” -
Add
“, and which do not fall within the definition of re-securitization exposure
in section 227(1),”.
(3) Section 237(2), in Table 24, after “APPROACH” -
Add
“(EXCLUDING RE-SECURITIZATION EXPOSURES)”.
(4) Section 237(3), after “issue specific ratings” -
Add
“, and which do not fall within the definition of re-securitization exposure
in section 227(1),”.
(5) Section 237(3), in Table 25, after “APPROACH” -
Add
“(EXCLUDING RE-SECURITIZATION EXPOSURES)”.
(6) After section 237(3) -
Add
“(4) For the purposes of subsection (1)(b), an authorized institution
shall allocate risk-weights to, or deduct from the institution’s core
capital and supplementary capital, securitization exposures which
have long-term ECAI issue specific ratings, and which fall within
the definition of re-securitization exposure in section 227(1), in
accordance with Table 25A such that -
(a) for those securitization exposures which map to a credit
quality grade of 4, the institution shall -
(i) allocate a risk-weight of 650% to the exposures if
the institution is an investing institution; or
(ii) deduct the exposures from the institution’s core
capital and supplementary capital if the institution is
the originating institution;
(b) for those securitization exposures which do not fall within
paragraph (a), the institution shall apply the treatment
Draft
122
specified in Table 25A to the exposures regardless of
whether the institution is an originating institution or
investing institution.
TABLE 25A
RISK-WEIGHTS OR DEDUCTIONS APPLICABLE TO LONG-TERM
CREDIT QUALITY GRADES UNDER STC(S) APPROACH - RE-
SECURITIZATION EXPOSURES
Long-term
credit quality
grade
Risk-weight Deduction
1 40% not applicable
2 100% not applicable
3 225% not applicable
4 650% (for investing
institutions)
deduction from core capital and
supplementary capital (for
originating institutions)
5 not applicable deduction from core capital and
supplementary capital
(5) For the purposes of subsection (1)(b), an authorized institution
shall allocate risk-weights to, or deduct from the institution’s core
capital and supplementary capital, securitization exposures which
have short-term ECAI issue specific ratings, and which fall within
the definition of re-securitization exposure in section 227(1), in
accordance with Table 25B.
TABLE 25B
RISK-WEIGHTS OR DEDUCTIONS APPLICABLE TO SHORT-
TERM CREDIT QUALITY GRADES UNDER STC(S) APPROACH -
RE-SECURITIZATION EXPOSURES
Short-term
credit quality
grade
Risk-weight Deduction
1 40% not applicable
2 100% not applicable
3 225% not applicable
4 not applicable deduction from core capital and
supplementary capital”.
Draft
123
86. Section 239 amended (Securitization positions which are in second loss
tranche or better in ABCP programmes)
Section 239(f) -
Repeal
“or 5”
Substitute
“, 5 or 7, as the case requires.”.
Draft
124
87. Section 240 amended (Treatment of liquidity facilities and servicer cash
advance facilities)
(1) Section 240(1) -
Repeal
“, (3)”.
(2) Section 240(2) -
Repeal
“Subject to subsection (3), an”
Substitute
“An”.
(3) Section 240(2)(a)(i)
Repeal
“Table 24 or 25”
Substitute
“Table 24, 25, 25A or 25B”.
(4) Section 240(2)(b)(i) -
Repeal
“or 5”
Substitute
“, 5 or 7”.
(5) Section 240(2)(b) -
Repeal subparagraph (ii)
Substitute
“(ii) apply to the undrawn portion of the facility a CCF of 50% for the
purposes of calculating the credit equivalent amount of that
undrawn portion; and”.
(6) Section 240 -
Repeal subsection (3).
(7) Section 240(6) -
Repeal
“, (3)”.
Draft
125
88. Repeal and substitution of section 241 (Treatment of overlapping facilities
and exposures)
Repeal the section
Substitute
“241. Treatment of overlapping facilities and exposures
(1) Where an authorized institution provides 2 or more facilities which
may be drawn in respect of the same securitization transaction such
that -
(a) duplicate coverage is provided in respect of the same
underlying exposure (referred to in this section as
‘overlapping portion A’); and
(b) a drawing on one such facility precludes the drawing,
whether in whole or in part, on another such facility,
the institution shall -
(c) calculate the risk-weighted amount of the overlapping
portion A on the basis of -
(i) if the facilities are subject to the same CCF,
attributing the overlapping portion A to any one of
the facilities;
(ii) if the facilities are subject to different CCFs,
attributing the overlapping portion A to the facility
with the highest CCF; and
(d) calculate the risk-weighted amount of that portion of each
of the facilities that is not the overlapping portion A.
(2) Where overlapping facilities are provided by different authorized
institutions, each institution shall calculate the risk-weighted
amount for the maximum amount of the facility provided by it.
(3) Subject to subsection (4), where -
(a) an authorized institution provides one or more than one
facility which may be drawn in respect of the same
securitization transaction and, at the same time, holds an
on-balance sheet securitization exposure in the transaction
(including any such exposure booked in the trading book of
the institution); and
(b) the on-balance sheet securitization exposure will benefit
from any drawdown of the facility such that the institution
has duplicate exposure to the same underlying exposures
(referred to in this section as ‘overlapping portion B’),
the institution shall -
Draft
126
(c) calculate the regulatory capital for the overlapping portion
B by attributing the overlapping portion B to the exposure
(that is, the facility or the on-balance sheet securitization
exposure) which will result in a higher regulatory capital
for the overlapping portion B; and
(d) calculate the regulatory capital for that portion of each of
the exposures that is not the overlapping portion B.
(4) An authorized institution shall not apply subsection (3) to the
overlapping portion B between [securitization] exposures booked
in the institution’s banking book and [securitization] exposures
booked in the institution’s trading book in respect of the same
securitization transaction unless it is able to calculate and compare
the regulatory capital for the exposures concerned such that it can
determine to which of those exposures the overlapping portion B
should be attributed for the purposes of subsection (3)(c).
(5) For the avoidance of doubt, it is hereby declared that -
(a) the regulatory capital calculated as required by subsection
(3)(c) for the overlapping portion B which has been
attributed to a securitization exposure booked in the trading
book of an authorized institution; and
(b) the regulatory capital calculated as required by subsection
(3)(d) for a securitization exposure booked in the trading
book of an authorized institution,
shall be included in the total market risk capital charge for specific
risk calculated under Part 8.
(6) In subsections (3), (4) and (5), regulatory capital ( ),
in relation to -
(a) a securitization exposure booked in the trading book
of an authorized institution; and
(b) the overlapping portion B which has been attributed
to such a securitization exposure,
means the market risk capital charge for specific risk determined in
accordance with the provisions applicable to securitization
exposures set out in Part 8.”.
Draft
127
89. Section 242 amended (Maximum regulatory capital for originating
institution)
Section 242(1), after “been securitized” -
Add
“through the transaction”.
Draft
128
90. Section 243 amended (Treatment of underlying exposures of originating
institution in synthetic securitization transactions)
(1) Section 243(2)(b)(i), after “Part 4” -
Add
“, Division 2 and this Division”.
(2) Section 243(2)(b)(ii), after “Part 5” -
Add
“, Division 2 and this Division”.
Draft
129
91. Section 245 amended (Calculation of risk-weighted amount of investors’
interest for securitization exposures of originating institution subject to early
amortization provision)
(1) Section 245(2)(c), after “were not securitized” -
Add
“through the transaction”.
(2) Section 245(3)(f) -
Repeal
“accumulated”
Substitute
“average”.
(3) Section 245(3) -
Repeal paragraph (g)
Substitute
“(g) in any case where the transaction does not require excess spread to
be trapped, treat the trapping point as 4.5%.”.
(4) Section 245(4)(f) -
Repeal
“accumulated”
Substitute
“average”.
(5) Section 245(4) -
Repeal paragraph (g)
Substitute
“(g) in any case where the transaction does not require excess spread to
be trapped, treat the trapping point as 4.5%.”.
Draft
130
92. Section 251 amended (Deductions from core capital and supplementary
capital)
(1) Section 251(1)(e) -
Repeal
“institution; and”
Substitute
“institution;”.
(2) Section 251(1), after paragraph (e) -
Add
“(ea) any securitization exposure of the institution in any case where the
institution is not in compliance, whether in whole or in part, with
section 230A in respect of that exposure; and”.
Draft
131
93. Repeal and substitution of section 253 (Treatment of overlapping facilities
and exposures)
Repeal the section
Substitute
“253. Treatment of overlapping facilities and exposures
(1) Where an authorized institution provides 2 or more facilities which
may be drawn in respect of the same securitization transaction such
that -
(a) duplicate coverage is provided in respect of the same
underlying exposure (referred to in this section as
‘overlapping portion A’); and
(b) a drawing on one such facility precludes the drawing,
whether in whole or in part, on another such facility,
the institution shall -
(c) calculate the risk-weighted amount of the overlapping
portion A on the basis of -
(i) if the facilities are subject to the same CCF,
attributing the overlapping portion A to any one of
the facilities;
(ii) if the facilities are subject to different CCFs,
attributing the overlapping portion A to the facility
with the highest CCF; and
(d) calculate the risk-weighted amount of that portion of each
of the facilities which is not the overlapping portion A.
(2) Where overlapping facilities are provided by different authorized
institutions, each institution shall calculate the risk-weighted
amount for the maximum amount of the facility provided by it.
(3) Subject to subsection (4), where -
(a) an authorized institution provides one or more than one
facility which may be drawn in respect of the same
securitization transaction and, at the same time, holds an
on-balance sheet securitization exposure in the transaction
(including any such exposure booked in the trading book of
the institution); and
(b) the on-balance sheet securitization exposure will benefit
from any drawdown of the facility such that the institution
has duplicate exposure to the same underlying exposures
(referred to in this section as ‘overlapping portion B’),
the institution shall -
Draft
132
(c) calculate the regulatory capital for the overlapping portion
B by attributing the overlapping portion B to the exposure
(that is, the facility or the on-balance sheet securitization
exposure) which will result in a higher regulatory capital
for the overlapping portion B; and
(d) calculate the regulatory capital for that portion of each of
the exposures that is not the overlapping portion B.
(4) An authorized institution shall not apply subsection (3) to the
overlapping portion B between [securitization] exposures booked
in the institution’s banking book and [securitization] exposures
booked in the institution’s trading book in respect of the same
securitization transaction unless it is able to calculate and compare
the regulatory capital for the exposures concerned such that it can
determine to which of those exposures the overlapping portion B
should be attributed for the purposes of subsection (3)(c).
(5) For the avoidance of doubt, it is hereby declared that -
(a) the regulatory capital calculated as required by subsection
(3)(c) for the overlapping portion B which has been
attributed to a securitization exposure booked in the trading
book of an authorized institution; and
(b) the regulatory capital calculated as required by subsection
(3)(d) for a securitization exposure booked in the trading
book of an authorized institution;
shall be included in the total market risk capital charge for specific
risk calculated under Part 8.
(6) In subsections (3), (4) and (5), regulatory capital ( ),
in relation to -
(a) a securitization exposure booked in the trading book of an
authorized institution; and
(b) the overlapping portion B which has been attributed to such
a securitization exposure,
means the market risk capital charge for specific risk determined in
accordance with the provisions applicable to securitization
exposures set out in Part 8.”.
Draft
133
94. Section 254 amended (Maximum regulatory capital for originating
institution)
Section 254(1), after “been securitized” -
Add
“through the transaction”.
Draft
134
95. Section 255 amended (Treatment of underlying exposures of originating
institutions in synthetic securitization transactions)
Section 255(2)(b), after “Part 4” -
Add
“and section 247(1)”.
Draft
135
96. Section 257 amended (Calculation of risk-weighted amount of investors’
interest for securitization exposures of originating institution subject to early
amortization provision)
(1) Section 257(3)(f) -
Repeal
“accumulated”
Substitute
“average”.
(2) Section 257(3) -
Repeal paragraph (g)
Substitute
“(g) in any case where the transaction does not require excess spread to
be trapped, treat the trapping point as 4.5%.”.
(3) Section 257(4)(f) -
Repeal
“accumulated”
Substitute
“average”.
(4) Section 257(4) -
Repeal paragraph (g)
Substitute
“(g) in any case where the transaction does not require excess spread to
be trapped, treat the trapping point as 4.5%.”.
Draft
136
97. Section 258 amended (Treatment of interest rate contracts and exchange rate
contracts)
Section 258 -
Repeal
“Part 4”
Substitute
“Part 6”.
Draft
137
98. Section 260A added (Reduction in risk-weighted amounts)
After section 260 -
Add
“260A. Reduction in risk-weighted amounts
Where an authorized institution has made a valuation adjustment, or
specific provision, in respect of a securitization exposure, the institution
shall, in calculating the risk-weighted amount of the exposure, reduce it by
an amount equal to the risk-weight of the exposure (determined in
accordance with section 262) multiplied by the aggregate amount of any
valuation adjustment and specific provision made in respect of the
exposure.”.
Draft
138
99. Section 262 amended (Determination of risk-weights)
(1) Section 262(1)(b) -
Repeal
“and (9)”
Substitute
“, (9), (10), (11), (12) and (13)”.
(2) Section 262(4) -
Repeal
“have”.
(3) Section 262(4) -
Repeal paragraphs (a) and (b)
Substitute
“(a) have a long-term ECAI issue specific rating and do not fall within
the definition of re-securitization exposure in section 227(1); or
(b) have a long-term inferred rating and do not fall within the
definition of re-securitization exposure in section 227(1).”.
(4) Section 262(4), Table 26, after “METHOD” -
Add
“(EXCLUDING RE-SECURITIZATION EXPOSURES)”.
(5) Section 262(6) -
Repeal
Everything after “subsection (5)” to and including “by using Formula 24.”
Substitute
“and subject to subsection (7), an authorized institution shall calculate the
effective number of underlying exposures by using Formula 24 and
treating multiple exposures to one obligor as one exposure.”.
(6) Section 262(6), Formula 24, N -
Repeal
Everything after and including “(in the case of” to and including “been
securitized)”.
(7) Section 262 -
Repeal subsection (7)
Draft
139
Substitute
“(7) Where the portfolio share of the largest exposure (referred to in
this subsection as “C1”) (being the amount of the largest exposure
in the pool of underlying exposures in a securitization transaction
as a percentage of the total amount of the pool) of an authorized
institution is available, the institution may, for the purposes of
Formula 24, calculate N in that formula as 1/C1.”.
(8) Section 262(8) -
Repeal
“have”.
(9) Section 262(8) -
Repeal paragraphs (a) and (b)
Substitute
“(a) have a short-term ECAI issue specific rating and do not fall within
the definition of re-securitization exposure in section 227(1); or
(b) have a short-term inferred rating and do not fall within the
definition of re-securitization exposure in section 227(1).”.
(10) Section 262(8), Table 27, after “METHOD” -
Add
“(EXCLUDING RE-SECURITIZATION EXPOSURES)”.
(11) After section 262(9) -
Add
“(10) For the purposes of subsection (1)(b), an authorized institution
shall allocate risk-weights to, or deduct from the institution’s core
capital and supplementary capital, securitization exposures in
accordance with Table 27A if the exposures -
(a) have a long-term ECAI issue specific rating and fall within
the definition of re-securitization exposure in section
227(1); or
(b) have a long-term inferred rating and fall within the
definition of re-securitization exposure in section 227(1).
Draft
140
TABLE 27A
RISK-WEIGHTS OR DEDUCTIONS APPLICABLE TO LONG-TERM
CREDIT QUALITY GRADES UNDER RATINGS-BASED METHOD
- RE-SECURITIZATION EXPOSURES
Long-term
credit
quality
grade
Risk-weight of
senior re-
securitization
exposures
A
Risk-weight of
non-senior re-
securitization
exposures
B
Deduction
1 20% 30% not applicable
2 25% 40% not applicable
3 35% 50% not applicable
4 40% 65% not applicable
5 60% 100% not applicable
6 100% 150% not applicable
7 150% 225% not applicable
8 200% 350% not applicable
9 300% 500% not applicable
10 500% 650% not applicable
11 750% 850% not applicable
12 not applicable not applicable deduction from core
capital and
supplementary capital
(11) For the purposes of subsection (1)(b), an authorized institution
shall allocate risk-weights to, or deduct from the institution’s core
capital and supplementary capital, securitization exposures in
accordance with Table 27B if the exposures -
(a) have a short-term ECAI issue specific rating and fall within
the definition of re-securitization exposure in section
227(1); or
(b) have a short-term inferred rating and fall within the
definition of re-securitization exposure in section 227(1).
Draft
141
TABLE 27B
RISK-WEIGHTS OR DEDUCTIONS APPLICABLE TO SHORT-
TERM CREDIT QUALITY GRADES UNDER RATINGS-BASED
METHOD - RE-SECURITIZATION EXPOSURES
Short-term
credit
quality
grade
Risk-weight of
senior re-
securitization
exposures
A
Risk-weight of
non-senior re-
securitization
exposures
B
Deduction
1 20% 30% not applicable
2 40% 65% not applicable
3 150% 225% not applicable
4 not applicable not applicable deduction from core
capital and
supplementary capital
(12) An authorized institution shall, in the case of a securitization
exposure which falls within subsection (10) or (11) and is not a
liquidity facility -
(a) allocate the applicable risk-weight specified in column A of
Table 27A or 27B, as the case may be, if -
(i) the exposure is a senior position as referred to in
subsection (2); and
(ii) none of the underlying exposures of the exposure is
a re-securitization exposure (irrespective of
whomsoever holds it); or
(b) allocate the applicable risk-weight specified in column B of
Table 27A or 27B, as the case may be, if any of the
conditions set out in paragraph (a) is not fulfilled.
(13) An authorized institution shall, in the case of a securitization
exposure which is a liquidity facility -
(a) allocate the applicable risk-weight specified in column A of
Table 26, 27, 27A or 27B, as the case may be, only if -
(i) the facility covers all of the outstanding debts
(including debts that are senior) supported by the
pool of underlying exposures in the securitization
transaction concerned; and
(ii) repayment of the facility has seniority over the
outstanding debts referred to in subparagraph (i),
Draft
142
such that no moneys from that pool of underlying
exposures may be applied towards the repayment of other
creditors until all drawings under the liquidity facility are
repaid in full; or
(b) allocate the applicable risk-weight specified in column B of
Table 26, 27, 27A or 27B, as the case may be, if any of the
conditions set out in paragraph (a) is not fulfilled.”.
Draft
143
100. Section 263 amended (Use of inferred ratings)
Section 263, after paragraph (c) -
Add
“(ca) the reference securitization exposure has not ceased to exist;”.
Draft
144
101. Section 264 amended (Calculation of risk-weighted amount of liquidity
facilities)
Section 264(1)(a) -
Repeal
“Table 26 or 27”
Substitute
“Table 26, 27, 27A or 27B”.
Draft
145
102. Section 265 amended (Recognized credit risk mitigation)
Section 265 -
Repeal paragraph (b)
Substitute
“(b) in the case of credit protection in the form of a recognized
guarantee (within the meaning of section 51(1)) or recognized
credit derivative contract (within the meaning of section 51(1)) -
(i) adopt the substitution framework in accordance with
sections 214(1), 215 and 216;
(ii) multiply the EAD of the exposure by the risk-weight of the
credit protection provider derived in section 216(3) in
respect of the portion covered by the credit protection; and
(iii) multiply the EAD of the exposure by the risk-weight of the
securitization exposure concerned in accordance with
section 262 in respect of the portion not covered by the
credit protection;
(c) in the case of credit protection in the form of recognized netting -
(i) take into account the credit risk mitigating effect of the
recognized netting in calculating the EAD of the exposure
in accordance with section 209(1), (2) and (4), where
applicable, in off-setting the credit risk of the securitization
exposure held by the institution; and
(ii) multiply the EAD of the exposure by the risk-weight
determined in accordance with section 262.”.
Draft
146
103. Section 268A added (Reduction in risk-weighted amount)
After section 267 -
Add
“268A. Reduction in risk-weighted amount
Where an authorized institution has made a valuation adjustment, or
specific provision, in respect of a securitization exposure, the institution
shall, in calculating the risk-weighted amount of the exposure, reduce it by
an amount equal to the risk-weight of the exposure (determined in
accordance with section 270(4) or 277(3)(a), as the case requires)
multiplied by the aggregate amount of any valuation adjustment and
specific provision made in respect of the exposure.”.
Draft
147
104. Section 270 amended (Use of supervisory formula)
(1) Section 270(1)(a) -
Repeal
“if those underlying exposures had not been securitized”
Substitute
“as if those exposures were directly held by the institution”.
(2) Section 270(2), paragraph (b)(i), after “T” -
Add
“in the case of a securitization exposure which is not a re-securitization
exposure and the product of 0.016 multiplied by T in the case of a re-
securitization exposure”.
(3) Section 270(4) -
Repeal
“securitization exposure”
Substitute
“securitization position held by it in a given tranche of a securitization
transaction”.
(4) Section 270(4), paragraph (a), after “7%” -
Add
“in the case of a securitization exposure which is not a re-securitization
exposure and 20% in the case of a re-securitization exposure”.
(5) Section 270(4)(b) -
Repeal
“exposure calculated by the use of Formula 25 by 12.5”
Substitute
“position calculated by the use of Formula 25 by 12.5 and then dividing it
by T”.
Draft
148
105. Section 271 amended (Capital charge factor for underlying exposures under
IRB approach)
(1) Section 271(a) -
Repeal
“capital charge”
Substitute
“sum of the capital charge and the EL amount”.
(2) Section 271(c)(ii), after “price discount” -
Add
“in respect of the underlying exposures”.
Draft
149
106. Section 274 amended (Effective number of underlying exposures)
(1) Section 274(a), after “section 262” -
Add
“, and pursuant to section 276,”.
(2) Section 274 -
Repeal paragraph (b).
(3) Section 274 -
Repeal paragraph (c)
Substitute
“(c) if the transaction is a re-securitization transaction, take into
account, in respect of the underlying exposures which are
securitization exposures (including such securitization exposures
not held by the institution) in that transaction, the number of those
securitization exposures instead of the number of underlying
exposures in the original pools in the securitization transactions
creating those first-mentioned underlying exposures.”.
Draft
150
107. Section 275 amended (Exposure-weighted average LGD)
(1) Section 275, paragraph (b) -
Repeal
“relevant”
Substitute
“securitization”.
(2) Section 275, paragraph (b) -
Repeal
Everything after “in the pool”
Substitute
“(including such securitization exposures not held by the institution) for
the re-securitization transaction;”.
Draft
151
108. Section 277 amended (Calculation of risk-weighted amount of liquidity
facilities)
(1) Section 277(1) -
Repeal paragraphs (b) and (c)
Substitute
“(b) apply a CCF of 100% to the undrawn portion of the facility for the
purposes of calculating the credit equivalent amount of that
undrawn portion; and”.
(2) Section 277(1)(d) -
Repeal
“or (c), as the case may be”.
(3) Section 277(3) -
Repeal paragraph (b)
Substitute
“(b) apply to the undrawn portion of the facility a CCF of 100% for the
purposes of calculating the credit equivalent amount of the
undrawn portion of the facility;”.
(4) Section 277(3)(c) -
Repeal
“(i) or (ii), as the case may be”.
(5) Section 277(6), after “unrated” -
Add
“eligible”.
(6) Section 277, after subsection (6) -
Add
“(6A) Where -
(a) an unrated liquidity facility provided by an authorized
institution is not an eligible liquidity facility; and
(b) the institution uses the supervisory formula method to
calculate its credit risk for securitization exposures,
the institution shall determine the risk-weight to be allocated to the
drawn portion of the facility, or whether that drawn portion is to be
deducted from the institution’s core capital and supplementary
capital, in accordance with subsections (1)(a) and (2).”.
Draft
152
(7) In subsection (7), after subsection (6) -
Add
“or (6A)”.
Draft
153
109. Section 278 amended (Treatment of recognized credit risk mitigation—full
credit protection)
(1) Section 278(a), after “section 270(4)” -
Add
“or 277(3)(a), as the case requires”.
(2) Section 278(b) -
Repeal
“section 51” (wherever appearing)
Substitute
“section 51(1)”.
(3) Section 278(b)(ii) -
Repeal the full stop and substitute a semicolon.
(4) Section 278, after paragraph (b) -
Add
“(c) in the case of credit protection in the form of recognized netting -
(i) take into account the credit risk mitigating effect of
recognized netting in calculating the EAD of the exposure
in accordance with section 209(1), (2) and (4), where
applicable, in off-setting the credit risk of the securitization
exposure held by the institution; and
(ii) multiply the EAD of the exposure by the risk-weight
determined in accordance with section 270(4) or 277(3)(a),
as the case requires.”.
Draft
154
110. Section 279 amended (Treatment of recognized credit risk mitigation -partial
credit protection)
(1) Section 279(1)(a) -
Repeal
“section 51) or a recognized credit derivative contract (within the meaning
of section 51)”
Substitute
“section 51(1)), a recognized credit derivative contract (within the
meaning of section 51(1)) or recognized netting”.
(2) Section 279(1)
Repeal paragraph (b)
Substitute
“(b) calculate the risk-weighted amount of the portion covered by a
recognized guarantee or recognized credit derivative contract by
applying section 278(b) to that portion;”.
(3) Section 279(1)(c), after “section 270(4)” -
Add
“or 277(3)(a), as the case requires,”.
Draft
155
111. Section 281 amended (Interpretation of Part 8)
(1) Section 281 -
Repeal the definition of investment grade
Substitute
“investment grade ( ) means -
(a) a credit quality grade of 1, 2 or 3 derived from mapping the
ECAI issuer rating assigned to an issuer, being a sovereign,
of any debt security to a scale of credit quality grades in
Table A in Schedule 6;
(b) a credit quality grade of 1, 2 or 3 derived from mapping the
ECAI issue specific rating assigned to any debt security
issued by a bank or securities firm to a scale of credit
quality grades in Table B in Schedule 6 or Part 1 of Table E
in that Schedule;
(c) a credit quality grade of 1, 2 or 3 derived from mapping the
ECAI issue specific rating assigned to any debt security
issued by a corporate (within the meaning of section 51(1)
or 139(1), as the case requires) to a scale of credit quality
grades in Part 1 of Table C in Schedule 6 or Part 1 of Table
E in that Schedule; or
(d) a credit quality grade of 1, 2, 3 or 4 derived from mapping
the ECAI issue specific rating assigned to any debt security
issued by a corporate (within the meaning of section 51(1)
or 139(1), as the case requires) incorporated in India to a
scale of credit quality grades in Part 2 of Table C in
Schedule 6 or Part 2 of Table E in that Schedule;”.
(2) Repeal the definition of mark-to-model.
(3) Section 281 -
Add in alphabetical order -
“comprehensive risk charge ( ), in relation to an authorized
institution, means the market risk capital charge for specific risk
calculated by the institution using the IMM approach under section
317(1)(f) to capture not only the incremental risks but also all
material factors affecting market risk inherent in the institution’s
correlation trading portfolio;
correlation trading portfolio ( ), in relation to an
authorized institution, means -
(a) a portfolio of securitization exposures or nth-to-
default credit derivative contracts, or both -
(i) which are not -
Draft
156
(A) re-securitization exposures; or
(B) derivatives of securitization
exposures that do not provide a pro-
rata share in the proceeds of a
securitization tranche;
(ii) where the underlying exposures of the
securitization exposures, or the reference
obligations of the nth-to-default credit
derivative contracts, are not -
(A) a regulatory retail exposure within
the meaning of section 51(1);
(B) an exposure which is subject to the
IRB approach for retail exposures
under section 144;
(C) a credit facility secured on one or
more than one residential property
for the purposes of financing or re-
financing the purchase of the
property or properties concerned;
and
(D) a credit facility secured on one or
more than one commercial property
for the purposes of financing or re-
financing the purchase of the
property or properties concerned;
(iii) which do not reference a claim on a special
purpose entity as defined in this section; and
(iv) where all reference obligations, in the case
of the nth
-to-default credit derivative
contracts, are single-name products
(including single-name credit derivative
contracts and commonly traded indices
based on single-name products) for which a
liquid two-way market exists; and
(b) any positions that hedge the securitization
exposures or nth-to-default credit derivative
contracts referred to in paragraph (a) where -
(i) the positions are not securitization exposures
or nth
-to-default credit derivative contracts;
and
Draft
157
(ii) a liquid two-way market exists for the
positions and the underlying exposures of
the positions;
credit migration risk ( ), in relation to an exposure of an
authorized institution, means the potential for direct and indirect
losses to the institution if there were an internal or external rating
downgrade or upgrade;
default risk ( ), in relation to an exposure of an authorized
institution, means the potential for direct and indirect losses to the
institution if the obligor were to default or a default event occurred;
incremental risk charge ( ), in relation to an authorized
institution, means the market risk capital charge for specific risk
calculated by the institution using the IMM approach under section
317(1)(e) to capture the default risk and credit migration risk that
are incremental to those that have been captured by the
institution’s VaR-based calculations under section 317(c) and (d)
(referred to in this Ordinance as ‘incremental risks’) in respect of
its trading book positions in -
(a) specific risk interest rate exposures, other than -
(i) securitization exposures;
(ii) nth-to-default credit derivative contracts; and
(iii) other specific risk interest rate exposures
that fall within paragraph (b) of the
definition of correlation trading portfolio in
this section; and
(b) listed equities and equity-related derivative
contracts based on listed equities;
nth
-to-default credit derivative contract ( ) means a credit
derivative contract under which -
(a) the protection buyer obtains credit protection for a
basket of exposures; and
(b) the nth
default among the obligations specified in the
contract for the purposes of determining whether a
credit event has occurred triggers the credit
protection and terminates the contract;
special purpose entity ( ), in relation to an authorized
institution’s correlation trading portfolio, means a company, trust
or other entity -
(a) organized for a specific purpose;
Draft
158
(b) the activities of which are limited to those
appropriate to accomplish that purpose; and
(c) the structure of which is intended to isolate the
obligations of the company, trust or other entity, as
the case may be, from the credit risk of an
originator or a seller of exposures;
specific risk interest rate exposures ( ), in relation to an
authorized institution, means the interest rate exposures of the
institution that are subject to market risk capital charge for specific
risk;
stressed VaR ( ), in relation to a portfolio of exposures held
by an authorized institution, means a VaR calculated by the
institution under the IMM approach with model inputs calibrated
to historical data from, subject to section 317(2)(a), a stressed VaR
relevant period;
stressed VaR relevant period ( ), in relation to an
authorized institution and the definition of stressed VaR in this
section, means a continuous 12-month period of significant
financial stress relevant to the portfolio of exposures concerned
held by the institution;
transitional period (securitization) ( ) means the period
from and including 1 January 2012 to and including 31 December
2013;
two-way market ( ) means a market where there are
independent bona fide offers to buy or sell such that -
(a) a price reasonably related to the last sales price or
current bona fide competitive bid and offer
quotations can be determined within one business
day; and
(b) transactions can be settled at such price within a
relatively short time in accordance with trade
custom;”.
Draft
159
112. Section 283 amended (Positions to be used to calculate market risk)
(1) Section 283(2)(a) -
Repeal
“section 51”
Substitute
“section 51(1)”.
(2) Section 283 -
Repeal subsections (3), (4) and (5).
Draft
160
113. Section 284 amended (Calculation of market risk capital charge for each risk
category)
Section 284(1) -
Repeal
“this Part”
Substitute
“Divisions 2 to 10”.
Draft
161
114. Section 286 amended (Calculation of market risk capital charge)
(1) Section 286 -
Repeal paragraph (a)
Substitute
“(a) calculate the market risk capital charge for specific risk of each of
its trading book positions (whether long or short) in debt securities
and debt-related derivative contracts -
(i) in accordance with section 287 if those positions arise from
non-securitization exposures which do not fall within
subparagraph (iii) or (iv);
(ii) in accordance with section 287A if those positions arise
from securitization exposures which do not fall within
subparagraph (iii);
(iii) in accordance with section 287B if those positions fall
within a correlation trading portfolio;
(iv) in accordance with section 287 and Division 10 if those
positions arise from credit derivative contracts which do
not fall within subparagraph (ii) or (iii);”.
(2) Section 286(b), before “calculate” -
Add
“subject to paragraph (c),”.
(3) Section 286(b)(iii) -
Repeal
“contracts.”
Substitute
“contracts; and”.
(4) Section 286, after paragraph (b) -
Add
“(c) calculate in accordance with section 288 and Division 10 the
market risk capital charge for general market risk of the interest
rate exposures arising from its trading book positions (whether
long or short) in credit derivative contracts.”.
Draft
162
115. Section 287 amended (Calculation of market risk capital charge for specific
risk for interest rate exposures which fall within section 286(a)(i) or (iv))
(1) Section 287(1), after “(8), (9)” -
Add
“, (9A)”.
(2) Section 287(1), after “debt-related derivative contracts” -
Add
“arising from its interest rate exposures which fall within section 286(a)(i)
or (iv)”.
(3) Section 287(1)(c), before “calculate” -
Add
“subject to subsection (1A),”.
(4) Section 287, after subsection (1) -
Add
“(1A) For the purposes of subsection (1), the total market risk capital
charge for specific risk of nth
-to-default credit derivative contracts
that fall within section 286(a)(iv) shall, during the transitional
period (securitization), be calculated as the higher of -
(a) the total market risk capital charge for specific risk of the
long positions; or
(b) the total market risk capital charge for specific risk of the
short positions.”.
(5) Section 287(2)(a) -
Repeal
“with the same issuer, coupon, currency and maturity”.
(6) Section 287(4) -
Repeal paragraph (b)
Substitute
“(aa) debt securities issued by public sector entities, and debt-related
derivative contracts where the underlying debt securities are issued
by public sector entities, where -
(i) subject to subparagraphs (ii) and (iii), the debt securities or
the underlying debt securities, as the case may be, are
assigned a credit quality grade of 2 or 3;
Draft
163
(ii) for the purposes of subparagraph (i), the credit quality
grade is determined as one grade below that assigned to the
sovereign, pursuant to subsection (3)(b) and (c), of the
jurisdiction in which the public sector entity concerned is
incorporated or, if there is no such lower credit quality
grade, the credit quality grade assigned to that sovereign
pursuant to that subsection; and
(iii) the institution treats as unrated any of those debt securities,
or any of those underlying debt securities, as the case may
be, where -
(A) they do not have an ECAI issue specific rating; or
(B) the sovereign of the jurisdiction in which the public
sector entity is incorporated does not have an ECAI
issuer rating;
(b) debt securities, not falling within paragraph (a) or (aa), which are
rated investment grade and debt-related derivative contracts where
the underlying debt securities, not falling within paragraph (a) or
(aa), which are rated investment grade; and”.
(7) In section 287(5)(b) -
Repeal the full stop and substitute a semicolon.
(8) In section 287(5), after paragraph (b) -
Add
“(c) include any debt securities, or underlying debt securities, in the
non-qualifying class in Table 28 which assigns a credit quality
grade of 5 if the application of subsection (4)(aa)(ii) to the debt
securities or the underlying debt securities, as the case may be,
results in the debt securities or underlying debt securities, as the
case may be, being assigned a credit quality grade of 6.”.
(9) Section 287, after subsection (9) -
Add
“(9A) For the purposes of subsection (1)-
(a) subject to paragraph (b), the market risk capital charge for
specific risk of an authorized institution’s positions in a
credit derivative contract (other than an nth
-to-default credit
derivative contract) may be capped at the maximum
possible loss arising from the contract calculated for each
individual position as -
(i) if the institution is a protection buyer, the change in
the value of the contract in the event that all the
Draft
164
reference obligations specified in the contract were
to become immediately default risk-free;
(ii) if the institution is a protection seller, the change in
the value of the contract in the event that all the
reference obligations specified in the contract were
to default immediately with zero recoveries; and
(b) for each position an authorized institution has in an nth
-to-
default credit derivative contract or nth-to-default credit-
linked note, irrespective of whether the institution is a
protection buyer or a protection seller -
(i) the market risk capital charge for specific risk of the
contract or note, where n is equal to 1, shall be the
lesser of -
(A) the sum of the market risk capital charge for
specific risk of the individual reference
obligations in the basket of reference
obligations specified in the contract or note,
as the case may be; or
(B) the institution’s maximum liability under the
contract or the fair value of the note, as the
case may be; and
(ii) the market risk capital charge for specific risk for
the contract or note, where n is greater than 1, shall
be the lesser of -
(A) the sum of the market risk capital charge for
specific risk of the individual reference
obligations in the basket of reference
obligations specified in the contract or note,
as the case may be, but disregarding the (n-1)
obligation or obligations with the lowest
market risk capital charge for specific risk;
or
(B) the institution’s maximum liability under the
contract or the fair value of the note, as the
case may be.”.
(10) Section 287(11) -
Add in alphabetical order
“ECAI issue specific rating ( ) -
(a) in relation to a debt security or, in the case of a debt-related
derivative contract, the underlying debt security, issued by
an issuer that is not a corporate incorporated in India,
means a short-term credit assessment rating or long-term
Draft
165
credit assessment rating that is assigned to the debt security
or underlying debt security, as the case may be, by an
ECAI within the meaning of paragraph (a), (b), (c), (d) or
(e) of the definition of external credit assessment
institution in section 2(1), and is for the time being neither
withdrawn nor suspended by that ECAI; or
(b) in relation to a debt security or, in the case of a debt-related
derivative contract, the underlying debt security, issued by
a corporate incorporated in India, means a short-term credit
assessment rating or long-term credit assessment rating that
is assigned to the debt security or underlying debt security,
as the case may be, by an ECAI, and is for the time being
neither withdrawn nor suspended by that ECAI;
ECAI issuer rating ( ) -
(a) in relation to the issuer of a debt security or, in the case of a
debt-related derivative contract, the underlying debt
security, that is not a corporate incorporated in India,
means a long-term credit assessment rating that is assigned
to the issuer by an ECAI within the meaning of paragraph
(a), (b), (c), (d) or (e) of the definition of external credit
assessment institution in section 2(1), and is for the time
being neither withdrawn nor suspended by that ECAI; or
(b) in relation to the issuer of a debt security or, in the case of a
debt-related derivative contract, the underlying debt
security, that is a corporate incorporated in India, means a
long-term credit assessment rating that is assigned to the
issuer by an ECAI, and is for the time being neither
withdrawn nor suspended by that ECAI;”.
Draft
166
116. Sections 287A (Calculation of market risk capital charge for specific risk for
interest rate exposures which fall within section 286(a)(ii)) and 287B
(Calculation of market risk capital charge for specific risk for interest rate
exposures which fall within section 286(a)(iii)) added
After section 287 -
Add
“287A. Calculation of market risk capital charge for specific risk for
interest rate exposures which fall within section 286(a)(ii)
(1) Subject to subsections (2) to (11), an authorized institution shall
apply Part 7, with all necessary modifications, to calculate the
market risk capital charge for specific risk arising from its
positions (whether long or short) in securitization exposures held
in the trading book which fall within section 286(a)(ii).
(2) For the purposes of subsection (1), an authorized institution shall
apply section 15 to determine whether the STC(S) approach or the
IRB(S) approach applies to securitization exposures referred to in
that subsection.
(3) Subject to subsections (4) to (11), an authorized institution shall
calculate the market risk capital charge for specific risk interest
rate exposures referred to in subsection (1) -
(a) subject to paragraph (b), by calculating the total market risk
capital charge for specific risk as -
(i) subject to paragraph (ii), the sum of the market risk
capital charge for specific risk of each of those
positions (long and short);
(ii) during the transitional period (securitization), the
higher of -
(A) the total market risk capital charge for
specific risk of the long positions; or
(B) the total market risk capital charge for
specific risk of the short positions;
(b) by capping the market risk capital charge for specific risk
for the institution’s positions in a securitization exposure at
the maximum possible loss arising from the positions,
which shall be calculated for each individual position as -
(i) for a short position, the change in the value of the
position in the event that all the underlying
exposures were to become immediately default risk-
free;
Draft
167
(ii) for a long position, the change in the value of the
position in the event that all the underlying
exposures were to default immediately with zero
recoveries.
(4) For the purposes of subsection (3), an authorized institution shall
not offset between positions except as provided for in section
287(2)(a).
(5) For the purposes of subsection (3), an authorized institution shall,
subject to subsections (6) to (9), calculate the market risk capital
charge of its positions (whether long or short) in rated
securitization exposures to which a credit quality grade has been
assigned in accordance with Part 7, by -
(a) multiplying the positions by the appropriate market risk
capital charge factors; or
(b) deducting the positions from the institution’s core capital
and supplementary capital,
as specified in subsection (6), (7), (8) or (9), as appropriate;
(6) For the purposes of subsection (3), an authorized institution shall,
in respect of its positions in rated securitization exposures which
do not fall within the definition of re-securitization exposure in
section 227(1) and which are subject to the STC(S) approach,
apply Division 3 of Part 7 as if -
(a) a reference in that Division to Table 24 were a reference to
Table 28A;
(b) a reference in that Division to Table 25 were a reference to
Table 28B; and
(c) a reference in that Division to risk-weight were a reference
to market risk capital charge factor.
Draft
168
TABLE 28A
MARKET RISK CAPITAL CHARGE FACTORS FOR SPECIFIC RISK OR
DEDUCTIONS APPLICABLE TO LONG-TERM CREDIT QUALITY GRADES
UNDER STC(S) APPROACH (EXCLUDING RE-SECURITIZATION EXPOSURES)
Long-term credit
quality grade
Market risk capital
charge factor
Deduction
1 1.6% not applicable
2 4.0% not applicable
3 8.0% not applicable
4 28% (for investing
institutions)
deduction from core capital and
supplementary capital (for
originating institutions)
5 not applicable deduction from core capital and
supplementary capital
TABLE 28B
MARKET RISK CAPITAL CHARGE FACTORS FOR SPECIFIC RISK OR
DEDUCTIONS APPLICABLE TO SHORT-TERM CREDIT QUALITY GRADES
UNDER STC(S) APPROACH (EXCLUDING RE-SECURITIZATION EXPOSURES)
Short-term credit
quality grade
Market risk capital
charge factor
Deduction
1 1.6% not applicable
2 4.0% not applicable
3 8.0% not applicable
4 not applicable deduction from core capital and
supplementary capital
Draft
169
(7) For the purposes of subsection (3), an authorized institution shall,
in respect of its positions in rated securitization exposures which
fall within the definition of re-securitization exposure in section
227(1) and which are subject to the STC(S) approach, apply
Division 3 of Part 7 as if -
(a) a reference in that Division to Table 25A were a reference
to Table 28C;
(b) a reference in that Division to Table 25B were a reference
to Table 28D; and
(c) a reference in that Division to risk-weight were a reference
to market risk capital charge factor.
TABLE 28C
MARKET RISK CAPITAL CHARGE FACTORS FOR SPECIFIC RISK OR
DEDUCTIONS APPLICABLE TO LONG-TERM CREDIT QUALITY GRADES
UNDER STC(S) APPROACH - RE-SECURITIZATION EXPOSURES
Long-term credit
quality grade
Market risk capital
charge factor
Deduction
1 3.2% not applicable
2 8.0% not applicable
3 18.0% not applicable
4 52% (for investing
institutions)
deduction from core capital and
supplementary capital (for
originating institutions)
5 not applicable deduction from core capital and
supplementary capital
Draft
170
TABLE 28D
MARKET RISK CAPITAL CHARGE FACTORS FOR SPECIFIC RISK OR
DEDUCTIONS APPLICABLE TO SHORT-TERM CREDIT QUALITY GRADES
UNDER STC(S) APPROACH - RE-SECURITIZATION EXPOSURES
Short-term credit
quality grade
Market risk capital
charge factor
Deduction
1 3.2% not applicable
2 8.0% not applicable
3 18.0% not applicable
4 not applicable deduction from core capital and
supplementary capital
(8) For the purposes of subsection (3), an authorized institution shall,
in respect of its positions in rated securitization exposures which
do not fall within the definition of re-securitization exposure in
section 227(1) and which are subject to the IRB(S) approach, apply
Divisions 4 and 5 of Part 7 as if -
(a) a reference in those Divisions to Table 26 were a reference
to Table 28E;
(b) a reference in those Divisions to Table 27 were a reference
to Table 28F; and
(c) a reference in those Divisions to risk-weight were a
reference to market risk capital charge factor.
Draft
171
TABLE 28E
MARKET RISK CAPITAL CHARGE FACTORS FOR SPECIFIC RISK OR
DEDUCTIONS APPLICABLE TO LONG-TERM CREDIT QUALITY GRADES
UNDER RATINGS-BASED METHOD IN IRB(S) APPROACH (EXCLUDING
RE-SECURITIZATION EXPOSURES)
Market risk capital charge factor Long-term
credit quality
grade A B C
Deduction
1 0.56% 0.96% 1.60% not applicable
2 0.64% 1.20% 2.00% not applicable
3 0.80% 1.44% 2.80% not applicable
4 0.96% 1.60% 2.80% not applicable
5 1.60% 2.80% 2.80% not applicable
6 2.80% 4.00% 4.00% not applicable
7 4.80% 6.00% 6.00% not applicable
8 8.00% 8.00% 8.00% not applicable
9 20.00% 20.00% 20.00% not applicable
10 34.00% 34.00% 34.00% not applicable
11 52.00% 52.00% 52.00% not applicable
12 Not applicable Not applicable not applicable deduction from
core capital and
supplementary
capital
Draft
172
TABLE 28F
MARKET RISK CAPITAL CHARGE FACTORS FOR SPECIFIC RISK OR
DEDUCTIONS APPLICABLE TO SHORT-TERM CREDIT QUALITY GRADES
UNDER RATINGS-BASED METHOD IN IRB(S) APPROACH (EXCLUDING
RE-SECURITIZATION EXPOSURES)
Market risk capital charge factor Short-term
credit quality
grade A B C
Deduction
1 0.56% 0.96% 1.60% not applicable
2 0.96% 1.60% 2.80% not applicable
3 4.80% 6.00% 6.00% not applicable
4 not applicable not applicable Not applicable deduction from
core capital and
supplementary
capital
(9) For the purposes of subsection (3), an authorized institution shall,
in respect of its positions in rated securitization exposures which
fall within the definition of re-securitization exposure in section
227(1) and which are subject to the IRB(S) approach, apply
Divisions 4 and 5 of Part 7 as if -
(a) a reference in those Divisions to Table 27A were a
reference to Table 28G;
(b) a reference in those Divisions to Table 27B were a
reference to Table 28H; and
(c) a reference in those Divisions to risk-weight were a
reference to market risk capital charge factor.
Draft
173
TABLE 28G
MARKET RISK CAPITAL CHARGE FACTORS FOR SPECIFIC RISK OR
DEDUCTIONS APPLICABLE TO LONG-TERM CREDIT QUALITY GRADES
UNDER RATINGS-BASED METHOD IN IRB(S) APPROACH -
RE-SECURITIZATION EXPOSURES
Market risk capital charge factor Long-term credit
quality grade Senior
re-securitization
positions
Non-senior
re-securitization
positions
Deduction
A B
1 1.60% 2.40% not applicable
2 2.00% 3.20% not applicable
3 2.80% 4.00% not applicable
4 3.20% 5.20% not applicable
5 4.80% 8.00% not applicable
6 8.00% 12.00% not applicable
7 12.00% 18.00% not applicable
8 16.00% 28.00% not applicable
9 24.00% 40.00% not applicable
10 40.00% 52.00% not applicable
11 60.00% 68.00% not applicable
12 not applicable not applicable deduction from core
capital and
supplementary
capital
Draft
174
TABLE 28H
MARKET RISK CAPITAL CHARGE FACTORS FOR SPECIFIC RISK OR
DEDUCTIONS APPLICABLE TO SHORT-TERM CREDIT QUALITY GRADES
UNDER RATINGS-BASED METHOD IN IRB(S) APPROACH -
RE-SECURITIZATION EXPOSURES
Market risk capital charge factor Short-term
credit quality
grade Senior
re-securitization
positions
Non-senior
re-securitization
positions
Deduction
A B
1 1.60% 2.40% not applicable
2 3.20% 5.20% not applicable
3 12.00% 18.00% not applicable
4 not applicable not applicable deduction from core
capital and
supplementary
capital
(10) For the purposes of subsection (3), an authorized institution shall,
subject to subsection (11) and with the Monetary Authority’s prior
consent, in respect of its positions in unrated securitization
exposures subject to the IRB(S) approach, use and consistently
apply -
(a) if the institution has obtained the Monetary Authority’s
approval to use the IRB approach to calculate the credit risk
capital charge for the IRB subclass into which the
underlying exposures of the positions are classified, the
supervisory formula method; or
(b) if the institution has obtained the Monetary Authority’s
approval to use the IMM approach to calculate the market
risk capital charge for specific risk of the underlying
exposures of the positions and the incremental risk charge
for such underlying exposures, the supervisory formula
method but applying the estimates for the probability of
default and loss given default for the purposes of
Draft
175
calculating KIRB under the supervisory formula method
which are produced by the internal model that the
institution uses to calculate the incremental risk charge.
(11) The market risk capital charge for specific risk of a position
calculated under subsection (10) shall not be lower than the market
risk capital charge for specific risk applicable to a rated and more
senior tranche.
287B. Calculation of market risk capital charge for specific risk for interest
rate exposures which fall within section 286(a)(iii)
(1) Subject to subsection (2), an authorized institution shall calculate
the market risk capital charge for specific risk of its positions
which fall within section 286(a)(iii) -
(a) in accordance with section 287A in respect of positions
(whether long or short) in securitization exposures which
fall within paragraph (a) of the definition of correlation
trading portfolio in section 281;
(b) in accordance with section 287 and Division 10 in respect
of positions (whether long or short) in nth-to-default credit
derivative contracts which fall within paragraph (a) of the
definition of correlation trading portfolio in section 281;
and
(c) in accordance with section 287 in respect of positions
(whether long or short) which fall within paragraph (b) of
the definition of correlation trading portfolio in section
281.
(2) The market risk capital charge for specific risk of an authorized
institution’s positions in a correlation trading portfolio is the higher
of -
(a) the total market risk capital charge for specific risk that
applies to long positions as calculated in accordance with
subsection (1); or
(b) the total market risk capital charge for specific risk that
applies to short positions as calculated in accordance with
subsection (1).”.
Draft
176
117. Section 289 amended (Construction of maturity ladder)
Section 289(4)(b), after “of that bond” -
Add
“as determined in accordance with section 4A as if measured at fair value”.
Draft
177
118. Section 297 amended (Preliminary steps to calculating market risk capital
charge)
After section 297(2) -
Add
“(3) In this section, current market price ( ) means
current market price as determined in accordance with section 4A
as if measured at fair value.”.
Draft
178
119. Section 307 amended (Specific risk)
(1) Section 307 -
Repeal subsections (5), (6), (7) and (8)
Substitute
“(5) Subject to subsection (6), an authorized institution shall, for the
purposes of calculating the market risk capital charge for specific
risk for nth
-to-default credit derivative contracts which fall within
section 286(a)(iv) -
(a) subject to paragraph (b), apply section 287 and Division 10;
(b) if the nth
-to-default credit derivative contract has an ECAI
issue specific rating, in respect of positions in which the
institution is the protection seller, assign a risk-weight to
the position, or deduct the position from the core capital
and supplementary capital of the institution, in accordance
with section 287A(6) or (8), as determined by the operation
of section 15 as if that contract were a securitization
exposure.
(6) Subject to subsection (7), for the purposes of subsection (5) -
(a) subject to paragraph (b), where an authorized institution
has a position in one of the reference obligations
underlying a first-to-default credit derivative contract and
the contract hedges that position, the institution may offset
with respect to the hedged amount -
(i) the market risk capital charge for specific risk of its
position in the reference obligation; and
(ii) that part of the market risk capital charge for
specific risk of the credit derivative contract that
relates to the reference obligation in which the
institution has that position;
(b) where an authorized institution has multiple positions in the
reference obligations underlying a first-to-default credit
derivative contract, the offsetting of market risk capital
charge otherwise allowed under paragraph (a) is allowed
only for its positions in the underlying reference obligation
having the lowest market risk capital charge for specific
risk.
(7) For the purposes of subsection (6), an authorized institution -
(a) shall offset the long and short positions in identical first-to-
default credit derivative contracts before applying that
subsection; and
Draft
179
(b) shall not offset the market risk capital charge for specific
risk of its position in any nth
-to-default credit derivative
contract, where n is greater than 1, with the market risk
capital charge of its position in any underlying reference
obligation.”.
Draft
180
120. Section 308 amended (Use of credit derivative contracts to offset specific risk)
Section 308(1), after “Subject to” -
Add
“section 307(6) and”.
Draft
181
121. Section 316 amended (Positions to be used to calculate market risk)
(1) Section 316(1), after “Subject to” -
Add
“section 23A and”.
(2) Section 316(2)(a) -
Repeal
“section 51”
Substitute
“section 51(1)”.
(3) Section 316 -
Repeal subsections (3), (4) and (5).
Draft
182
122. Section 317 repealed and substituted (Calculation of risk-weighted amount
for market risk)
Section 317 -
Repeal the section
Substitute
“317. Calculation of risk-weighted amount for market risk
(1) Subject to section 317A(1), an authorized institution shall calculate
the risk-weighted amount for market risk as the sum of -
(a) the market risk capital charge for general market risk
calculated by the institution's internal model expressed as
VaR;
(b) the market risk capital charge for general market risk
calculated by the institution’s internal model expressed as
stressed VaR;
(c) where applicable, the market risk capital charge for specific
risk calculated by the institution’s internal model expressed
as VaR (except that the institution need not capture the
default risk and credit migration risk of positions that are
subject to the incremental risk charge);
(d) where applicable, the market risk capital charge for specific
risk calculated by the institution’s internal model expressed
as stressed VaR (except that the institution need not capture
the default risk and credit migration risk of positions that
are subject to the incremental risk charge);
(e) where applicable, the incremental risk charge calculated by
the institution’s internal model;
(f) where applicable, the comprehensive risk charge calculated
by the institution’s internal model in respect of specific risk
interest rate exposures which fall within a correlation
trading portfolio; and
(g) where applicable, the supplemental capital charge referred
to in section 318(3) in respect of specific risk interest rate
exposures which fall within a correlation trading portfolio,
multiplied by 12.5.
(2) The institution shall, for the purposes of calculating stressed VaR
under subsection (1)(b) or (d) -
(a) obtain the prior consent of the Monetary Authority for the
use of a stressed VaR relevant period in respect of any
portfolio of exposures included in the calculation; and
Draft
183
(b) if such prior consent is obtained, regularly review, on at
least an annual basis, the appropriateness of such period.
(3) Where an authorized institution uses one internal model to
calculate both the market risk capital charge for general market
risk under subsection (1)(a) and the market risk capital charge for
specific risk under subsection (1)(c), the institution shall, in that
calculation, use the higher of -
(a) the institution’s VaR for all risk categories as at the last
trading day; or
(b) the average VaR for the last 60 trading days multiplied by a
multiplication factor, mc, determined under section 319(1).
(4) Where an authorized institution uses one internal model to
calculate both the market risk capital charge for general market
risk under subsection (1)(b) and the market risk capital charge for
specific risk under subsection (1)(d), the institution shall, in that
calculation, use the higher of -
(a) the institution’s latest available stressed VaR for all risk
categories; or
(b) the average stressed VaR for the last 60 trading days
multiplied by a multiplication factor, ms, determined under
section 319(4).
(5) Where an authorized institution uses one internal model to
calculate, where applicable, the incremental risk charge under
subsection (1)(e), the institution shall, in that calculation, apply a
scaling factor, Si, determined under section 319(5), to the higher of
-
(a) the institution’s latest available incremental risk charge; or
(b) the average incremental risk charge for the last 12 weeks.
(6) Where an authorized institution uses one internal model to
calculate, where applicable, the comprehensive risk charge of the
correlation trading portfolio under subsection (1)(f), the institution
shall, in that calculation, use the higher of -
(a) the comprehensive risk charge calculated in accordance
with subsection (7); or
(b) 8% of the market risk capital charge for specific risk
calculated in accordance with section 287B under the STM
approach.
(7) An authorized institution shall, for the purposes of subsection (6),
apply a scaling factor, Sc, determined under section 319(6), to the
higher of -
Draft
184
(a) the institution’s latest available comprehensive risk charge;
or
(b) the average comprehensive risk charge for the last 12
weeks.
(8) Where an authorized institution uses more than one internal model
to calculate the market risk capital charge for general market risk
and the market risk capital charge for specific risk, the institution
shall comply with subsections (3) to (7), as the case requires,
except that it shall apply the subsection or subsections concerned
separately to the relevant market risk capital charge generated from
each model.”.
Draft
185
123. Sections 317A (Provisions supplementary to section 317 - calculation of
market risk capital charge for interest rate exposures), 317B (Provisions
supplementary to section 317 - calculation of market risk capital charge for
equity exposures) and 317C (Provisions supplementary to section 317 -
calculation of market risk capital charge for foreign exchange (including gold)
exposures)
After section 317 -
Add
“317A. Provisions supplementary to section 317 - calculation of market risk
capital charge for interest rate exposures
(1) An authorized institution shall use the STM approach to calculate
the market risk capital charge for specific risk of its trading book
positions (whether long or short) in -
(a) nth
-to-default credit derivative contracts which fall within
section 286(a)(iv);
(b) securitization exposures which fall within section 286(a)(ii);
and
(c) exposures within a correlation trading portfolio which fall
within section 286(a)(iii) but for which portfolio the
institution does not have the approval of the Monetary
Authority to calculate a comprehensive risk charge.
(2) An authorized institution to which subsection (1) applies may, in
addition to complying with that subsection, also make an
application under section 18(1) to the Monetary Authority which
complies with section 18(1A)(b) in respect of the VaR and stressed
VaR for specific risk for the institution’s interest rate exposures
referred to in subsection (1)(a) and (b).
(3) Subject to section 18A(3), for the avoidance of doubt, where -
(a) an authorized institution uses the IMM approach;
(b) the Monetary Authority is satisfied that the institution is in
compliance with the requirements set out in sections 1 and
2 of Schedule 3; and
(c) in any case in which the institution has positions that are
subject to the incremental risk charge or comprehensive
risk charge, or both, the Monetary Authority is satisfied
that the institution is in compliance with the requirements
set out in -
(i) section 3 or 4 of Schedule 3; or
(ii) sections 3 and 4 of Schedule 3,
as appropriate,
Draft
186
the institution is not required to calculate the market risk capital
charge for specific risk under the STM approach for interest rate
exposures other than for the positions referred to in subsection (1).
317B. Provisions supplementary to section 317 - calculation of market risk
capital charge for equity exposures
Where an authorized institution has equity exposures which fall within
paragraph (b) of the definition of incremental risk charge in section 281,
the institution may, at its discretion, make an application under section
18(1) to the Monetary Authority which complies with section 18(1A)(e) to
calculate an incremental risk charge for such exposures.
317C. Provisions supplementary to section 317 - calculation of market risk
capital charge for foreign exchange (including gold) exposures
An authorized institution shall not exclude, for the purposes of calculating
the market risk capital charge for its positions in foreign exchange
(including gold) and exchange rate-related derivative contracts, any of its
structural positions (within the meaning of section 295(3)) from the
calculation except after consultation with the Monetary Authority.”.
Draft
187
124. Section 318 repealed and substituted (Capital treatment for trading book
positions subject to incremental risk charge or comprehensive risk charge)
Section 318 -
Repeal the section
Substitute
“318. Capital treatment for trading book positions subject to incremental
risk charge or comprehensive risk charge
(1) Subject to subsection (2), an authorized institution may calculate
an incremental risk charge, or a comprehensive risk charge in
respect of its correlation trading portfolio, using an internally-
developed approach.
(2) For the calculation of the incremental risk charge or
comprehensive risk charge, an authorized institution -
(a) shall comply with the requirements specified in Schedule 3
applicable to or in relation to the institution;
(b) shall incorporate those positions in the institution’s
calculation of VaR and stressed VaR; and
(c) shall not make any adjustment for double-charging of
capital between the incremental risk charge and
comprehensive risk charge, or among those 2 capital
charges and other market risk capital charges, applicable to
those positions.
(3) The Monetary Authority may, by notice in writing given to an
authorized institution, impose a supplemental capital charge
against a correlation trading portfolio of the institution, to be added
to the institution’s capital requirement calculated under its
internally-developed approach, if the Monetary Authority is
satisfied that the stress-testing results referred to in section 4(g)
and (h) of Schedule 3 indicate a material shortfall in its
comprehensive risk charge.
(4) For the avoidance of doubt, an authorized institution shall use the
STM approach to calculate -
(a) the market risk capital charge for general market risk and
the market risk capital charge for specific risk in respect of
any positions which fall within paragraph (a) of the
definition of incremental risk charge in section 281 but for
which the institution does not have the approval of the
Monetary Authority to calculate an incremental risk charge;
and
(b) the market risk capital charge for specific risk in respect of
any positions which fall within a correlation trading
Draft
188
portfolio but for which the institution does not have the
approval of the Monetary Authority to calculate a
comprehensive risk charge.”.
Draft
189
125. Section 319 amended (Multiplication and scaling factors)
(1) Section 319(1) -
Repeal
“multiplication factor to be used by an authorized institution”
Substitute
“multiplication factor, mc, to be used by an authorized institution for the
purposes of section 317(3)”.
(2) Section 319, after subsection (2) -
Add
“(2A) An authorized institution shall not, without the prior consent of the
Monetary Authority, make any significant change to the approach
it uses to determine the number of back-testing exceptions under
subsection (1)(b).”.
(3) After subsection (3) -
Add
“(4) The multiplication factor, ms, to be used by an authorized
institution for the purposes of section 317(4) shall be the sum of -
(a) the value of 3;
(b) a plus factor determined in accordance with subsection
(1)(b); and
(c) any additional plus factor assigned to the institution
pursuant to subsection (3).
(5) The scaling factor, Si, to be used by an authorized institution for
the purposes of section 317(5) shall be 1 or such other value as the
Monetary Authority may specify in a notice in writing given to the
institution.
(6) The scaling factor, Sc, referred to in section 317(7), to be used by
an authorized institution for the purposes of section 317(6) shall be
1 or such other value as the Monetary Authority may specify in a
notice in writing given to the institution.”.
Draft
190
126. Schedule 2 amended (Minimum requirements to be satisfied for approval
under section 8 of these Rules to use IRB approach)
Section 1(i) -
Repeal subparagraph (v)
Substitute
“(v) reviewing any proposed development of, or any proposed
significant change to, the institution’s rating system to assess
whether the rating system will function effectively as intended if
the proposed development is implemented or the proposed change
made, as the case may be; and”.
Draft
191
127. Schedule 3 amended (Minimum requirements to be satisfied for approval
under section 18 of these Rules to use IMM approach)
(1) Section 1(n) -
Repeal subparagraphs (i) to (v)
Substitute
“(i) VaR is computed on a daily basis and stressed VaR is computed on
not less than a weekly basis;
(ii) a one-tailed 99% confidence interval is used in calculating VaR
(including stressed VaR);
(iii) the minimum holding period used by, or assumed by, the relevant
models is 10 trading days for the institution’s portfolio of
exposures but, where VaR (including stressed VaR) is calculated
according to shorter holding periods scaled up to 10 days, the
institution shall demonstrate periodically the reasonableness of that
approach to the satisfaction of the Monetary Authority;
(iv) subject to subparagraph (vi), the historical observation period for
calculating VaR (including stressed VaR) is not less than 250
trading days;
(v) if the institution applies a weighting scheme to the historical
observations for the calculation of VaR (excluding stressed VaR),
a higher weighting is assigned to recent observations;
(va) the institution does not apply a weighting scheme to the historical
observations for the calculation of stressed VaR;
(vb) if the institution calculates VaR (excluding stressed VaR) using a
weighting scheme that is not fully consistent with the requirements
of subparagraphs (iv) and (v), that scheme results in a market risk
capital charge that is not lower than that which would be calculated
by the use of a scheme which fully complies with the requirements
of those subparagraphs;”.
(2) Schedule 3, section 1(n)(iv), Chinese text -
Repeal
“段”
Substitute
“節”
(3) Section 1(n)(vi), after “VaR” -
Add
“(excluding stressed VaR)”.
Draft
192
(4) Section 1(n) -
Repeal subparagraph (vii)
Substitute
“(vii) data used are updated at least once every month and are reassessed
whenever market prices are subject to material change, and the
updating process is flexible enough to allow for more frequent
updates where necessary;”.
(5) Section 1(n)(ix)(B), after “VaR” -
Add
“(including stressed VaR)”.
(6) Section 2(a)(v) -
Repeal
“(referred to in this Schedule as ‘event risk’)”.
(7) Section 2 -
Repeal paragraph (b).
(8) Section 2 -
Repeal paragraph (e)
Substitute
“(e) where applicable, the institution has an internally-developed
approach or approaches for calculating the incremental risk charge
or comprehensive risk charge, or both, of the institution’s trading
book positions; and”.
(9) After section 2 -
Add
“3. Additional requirements relating to internally-developed approach
for calculation of incremental risk charge
Without prejudice to the generality of the applicable requirements in
sections 1 and 2, an authorized institution shall demonstrate to the
satisfaction of the Monetary Authority that, if the institution uses the
relevant models to calculate an incremental risk charge -
(a) the relevant models capture and adequately reflect, on a
continuing basis, the incremental risks inherent in the
institution’s relevant positions as specified in paragraph (a),
or paragraphs (a) and (b), as the case requires, of the
definition of incremental risk charge in section 281;
(b) the relevant models do not capture any positions in
securitization exposures or nth
-to-default credit derivative
Draft
193
contracts, even when such positions are viewed as hedging
the underlying exposures held in the trading book;
(c) the incremental risk charge is measured at a 99.9%
confidence interval over a capital horizon (being the time
period over which default risk and credit migration risk are
measured) of one year, taking into account the liquidity
horizons (being the time required to sell the position, or to
hedge all material risks covered by the internal model that
the institution uses to calculate the incremental risk charge,
in a stressed market) applicable to individual positions or
sets of positions;
(d) the liquidity horizon for a position or set of positions is
subject to a floor of 3 months;
(e) the relevant models adopt, consistently and across all of the
positions subject to the incremental risk charge -
(i) the assumption of a constant level of risk over the
one year capital horizon, incorporating, for those
individual positions that have experienced default or
credit migration over their liquidity horizons, the
effect of rebalancing those positions at the end of
their liquidity horizons so as to achieve the
institution’s initial level of risk; or
(ii) a one-year constant position assumption over the
capital horizon;
(f) the relevant models incorporate correlation effects among
the risk factors modelled, including the impact of a
clustering of default and migration events but excluding the
impact of diversification between default or migration
events and other market variables;
(g) the relevant models reflect -
(i) issuer and market concentration; and
(ii) concentrations that may arise within and across
product classes under stressed conditions;
(h) positions are netted only when long and short positions
refer to the same underlying exposure, otherwise the
positions are captured on a gross basis;
(i) the relevant models only recognize the hedging or
diversification effects associated with long and short
positions -
(i) involving different instruments or different
underlying exposures of the same obligor;
Draft
194
(ii) in different issuers,
by capturing and modelling separately the gross long and
gross short positions in those instruments or underlying
exposures and incorporating any basis risks and residual
risks involved;
(j) the relevant models reflect the nonlinear impact of options
and other positions with material nonlinear behaviour with
respect to price changes, taking account of model risk
inherent in the valuation and estimation of price risks
associated with such positions;
(k) the incremental risk charge is computed at least once a
week, or more frequently as required by the Monetary
Authority;
(l) where the institution chooses to include equity exposures in
the calculation pursuant to section 317B of these Rules -
(i) the inclusion of such exposures in the calculation is
consistent with how the institution internally
measures and manages the default risk and credit
mitigation risk of those exposures;
(ii) such exposures are included in the incremental risk
charge calculation in a consistent manner; and
(iii) the institution applies section 149 of these Rules in
determining whether a default has occurred; and
(m) the institution satisfies the minimum requirements
comparable to those set out in section 1 of Schedule 2 for
the use of the IRB approach for the calculation of credit
risk, using the assumption of a constant level of risk and
with any necessary adjustments to reflect the impact of
liquidity, concentrations and hedging on, and the option
characteristics of, the institution’s market risk exposures.
4. Additional requirements relating to internally-developed approach
for calculation of comprehensive risk charge
Without prejudice to the generality of the applicable requirements in
sections 1 and 2, an authorized institution shall demonstrate to the
satisfaction of the Monetary Authority that, if the institution uses an
internally-developed approach to calculate the comprehensive risk charge
for its correlation trading portfolio -
(a) the institution is active in trading positions that fall within
the correlation trading portfolio (having regard to market
perception and the institution’s own judgement of the
significance of such activities to itself and to the markets in
which it operates);
Draft
195
(b) the institution applies, consistently and with any necessary
modifications, section 3(c) to (j) and (m) of this Schedule
in its calculation of comprehensive risk charge as in its
calculation of incremental risk charge;
(c) the relevant models capture and adequately reflect, on a
continuing basis, not only the incremental risks but also all
material risk factors affecting market risk inherent in the
institution’s correlation trading portfolio;
(d) the institution has sufficient market data to ensure that its
relevant models fully capture the material risks of its
correlation trading portfolio;
(e) the comprehensive risk charge calculated by the institution
is able to provide a justification for the historical price
variation of its positions in the correlation trading portfolio;
(f) the institution is able to segregate those positions which it
has the Monetary Authority’s approval to incorporate into
its calculation of comprehensive risk charge from those
positions for which it does not hold such an approval;
(g) the institution regularly applies a set of specific,
predetermined stress scenarios to its correlation trading
portfolio to examine the implications of stresses to -
(i) default rates;
(ii) recovery rates;
(iii) credit spreads; and
(iv) correlations on the correlation trading portfolio’s
profit or loss;
(h) in respect of compliance with paragraph (g), the
institution -
(i) applies the stress scenarios at least weekly, and
reports the results, including comparisons with the
comprehensive risk charge calculated using the
institution’s internally-developed approach, to the
Monetary Authority within 6 weeks (unless
otherwise advised by the Monetary Authority) after
the end of each quarter, or within such a period and
on such a shorter interval as advised by the
Monetary Authority; and
(ii) reports to the Monetary Authority any instances
where the stress tests indicate a material shortfall of
the comprehensive risk charge as soon as
Draft
196
reasonably practicable in all the circumstances of
the case; and
(i) in respect of the relevant model, comprehensive risk charge
is computed at least weekly, or more frequently as required
by the Monetary Authority.”.
Draft
197
128. Schedule 4 amended (Minimum requirements to be satisfied for approval
under section 25 of these Rules to use STO approach or ASA approach)
Section 2(c)(ix), after “board of directors” -
Add
“(or a committee designated by the board)”.
Draft
198
129. Schedule 5 amended (Other deductions from core capital and supplementary
capital)
(1) Schedule 5, paragraph (d), after “(c), (d)” -
Add
“, (da)”.
(2) Schedule 5, paragraph (e), after “(d), (e)” -
Add
“, (ea)”.
(3) Paragraph (e) -
Repeal the full stop and substitute a semicolon.
(4) After paragraph (e) -
Add
“(f) in relation to an authorized institution which is subject to Part 8 of
these Rules, the amount of the sum of the securitization exposures
in the trading book that are subject to deduction under -
(i) section 236(1)(a), (c), (d), (da) or (e) or 251(1)(a), (c), (d),
(e), (ea) or (f) of these Rules by virtue of the operation of
section 287A of these Rules; and
(ii) section 307(5) of these Rules;
(g) in relation to an authorized institution which uses the STC
approach, the amount of the institution’s exposure that is subject to
deduction under section 68(c) or 74(3)(a) of these Rules.”.
Draft
199
130. Schedule 6 amended (Credit quality grades)
(1) Schedule 6, after “[ss. 55, 59, 60, 61,” -
Add
“61A,”.
(2) Schedule 6 -
Repeal Table A
Substitute
“TABLE A
SOVEREIGN EXPOSURES
Credit
quality
grade
(sovereigns)
Standard
& Poor's
Ratings
Services
Moody's
Investors
Service
Fitch
Ratings
Rating and
Investment
Information,
Inc.
Japan Credit
Rating
Agency,
Ltd.
1 AAA
AA+
AA
AA-
Aaa
Aa1
Aa2
Aa3
AAA
AA+
AA
AA-
AAA
AA+
AA
AA-
AAA
AA+
AA
AA-
2 A+
A
A-
A1
A2
A3
A+
A
A-
A+
A
A-
A+
A
A-
3 BBB+
BBB
BBB-
Baa1
Baa2
Baa3
BBB+
BBB
BBB-
BBB+
BBB
BBB-
BBB+
BBB
BBB-
4 BB+
BB
BB-
Ba1
Ba2
Ba3
BB+
BB
BB-
BB+
BB
BB-
BB+
BB
BB-
5 B+
B
B-
B1
B2
B3
B+
B
B-
B+
B
B-
B+
B
B-
6 CCC+
CCC
CCC-
CC
C
D
Caa1
Caa2
Caa3
Ca
C
CCC
CC
C
D
CCC+
CCC
CCC-
CC
C
CCC
CC
C
D”.
Draft
200
(3) Schedule 6 -
Repeal Table B
Substitute
“TABLE B
BANK AND SECURITIES FIRM EXPOSURES
Credit
quality grade
(banks and
securities
firms)
Standard
& Poor's
Ratings
Services
Moody's
Investors
Service
Fitch
Ratings
Rating and
Investment
Information,
Inc.
Japan Credit
Rating
Agency,
Ltd.
1 AAA
AA+
AA
AA-
Aaa
Aa1
Aa2
Aa3
AAA
AA+
AA
AA-
AAA
AA+
AA
AA-
AAA
AA+
AA
AA-
2 A+
A
A-
A1
A2
A3
A+
A
A-
A+
A
A-
A+
A
A-
3 BBB+
BBB
BBB-
Baa1
Baa2
Baa3
BBB+
BBB
BBB-
BBB+
BBB
BBB-
BBB+
BBB
BBB-
4 BB+
BB
BB-
B+
B
B-
Ba1
Ba2
Ba3
B1
B2
B3
BB+
BB
BB-
B+
B
B-
BB+
BB
BB-
B+
B
B-
BB+
BB
BB-
B+
B
B-
5 CCC+
CCC
CCC-
CC
C
D
Caa1
Caa2
Caa3
Ca
C
CCC
CC
C
D
CCC+
CCC
CCC-
CC
C
CCC
CC
C
D”.
Draft
201
(4) Schedule 6 -
Repeal Table C
Substitute
“TABLE C
CORPORATE EXPOSURES
PART 1
Credit
quality
grade
(corporates
)
Standard
& Poor's
Ratings
Services
Moody's
Investors
Service
Fitch
Ratings
Rating and
Investment
Information,
Inc.
Japan
Credit
Rating
Agency
, Ltd.
Risk-
weight
1 AAA
AA+
AA
AA-
Aaa
Aa1
Aa2
Aa3
AAA
AA+
AA
AA-
AAA
AA+
AA
AA-
AAA
AA+
AA
AA-
20%
2 A+
A
A-
A1
A2
A3
A+
A
A-
A+
A
A-
A+
A
A-
50%
3 BBB+
BBB
BBB-
Baa1
Baa2
Baa3
BBB+
BBB
BBB-
BBB+
BBB
BBB-
BBB+
BBB
BBB-
100%
4 BB+
BB
BB-
Ba1
Ba2
Ba3
BB+
BB
BB-
BB+
BB
BB-
BB+
BB
BB-
100%
5 B+
B
B-
CCC+
CCC
CCC-
CC
C
D
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
B+
B
B-
CCC
CC
C
D
B+
B
B-
CCC+
CCC
CCC-
CC
C
B+
B
B-
CCC
CC
C
D
150%
Draft
202
PART 2
Credit
quality
grade
(corporates)
Credit Analysis
and Research
Limited
CRISIL
Limited
ICRA
Limited Risk-weight
1 CARE AAA
CARE AAA (Is)
AAA LAAA
IrAAA
20%
2 CARE AA+
CARE AA
CARE AA-
CARE AA+ (Is)
CARE AA (Is)
CARE AA- (Is)
AA+
AA
AA-
LAA+
LAA
LAA-
IrAA+
IrAA
IrAA-
30%
3 CARE A+
CARE A
CARE A-
CARE A+ (Is)
CARE A (Is)
CARE A- (Is)
A+
A
A-
LA+
LA
LA-
IrA+
IrA
IrA-
50%
4 CARE BBB+
CARE BBB
CARE BBB-
CARE BBB+
(Is)
CARE BBB (Is)
CARE BBB- (Is)
BBB+
BBB
BBB-
LBBB+
LBBB
LBBB-
IrBBB+
IrBBB
IrBBB-
100%
5 CARE BB+
CARE BB
CARE BB-
CARE B+
CARE B
CARE B-
CARE C+
CARE C
CARE C-
CARE D
CARE BB+ (Is)
CARE BB (Is)
CARE BB- (Is)
CARE B+ (Is)
BB+
BB
BB-
B+
B
B-
C+
C
C-
D
LBB+
LBB
LBB-
LB+
LB
LB-
LC+
LC
LC-
LD
IrBB+
IrBB
IrBB-
IrB+
150%”.
Draft
203
CARE B (Is)
CARE B- (Is)
CARE C+ (Is)
CARE C (Is)
CARE C- (Is)
CARE D (Is)
IrB
IrB-
IrC+
IrC
IrC-
(5) Schedule 6 -
Repeal Table E
Substitute
“TABLE E
SHORT-TERM EXPOSURES (BANKS, SECURITIES FIRMS
AND CORPORATES)
PART 1
Short-term
credit
quality
grade
(banks,
securities
firms and
corporates)
Standard
& Poor's
Ratings
Services
Moody's
Investors
Service
Fitch
Ratings
Rating and
Investment
Information,
Inc.
Japan
Credit
Rating
Agency
, Ltd.
Risk-
weight
1 A-1+
A-1
P-1
F1+
F1
a-1+
a-1
J-1+
J-1
20%
2 A-2
P-2 F2 a-2 J-2 50%
3 A-3 P-3 F3
a-3 J-3 100%
4 B
B-1
B-2
B-3
C
D
NP B
C
D
b
c
NJ
D
150%
Draft
204
PART 2
Short-term
credit quality
grade
(corporates)
Credit Analysis
and Research
Limited
CRISIL
Limited
ICRA
Limited
Risk-
weight
1 PR1+
P1+ A1+ 20%
2 PR1
P1 A1 30%
3 PR2+
PR2
P2+
P2
A2+
A2
50%
4 PR3+
PR3
P3+
P3
A3+
A3
100%
5 PR4
PR5
P4+
P4
P5
A4+
A4
A5
150%”.
Draft
205
131. Schedule 7 amended (Standard supervisory haircuts for comprehensive approach to
treatment of recognized collateral)
(1) Schedule 7, section 1, Table -
Repeal Part 1
Substitute
“PART 1
STANDARD SUPERVISORY HAIRCUTS
FOR DEBT SECURITIES
Credit
quality
grade/
Standard supervisory
haircuts
Item
Types of
exposure or
recognized
collateral
short-term
credit
quality
grade
Residual
maturity
Sovereign
issuers
other
issuers
1. (a) not more than 1
year
0.5% 1%
(b) more than 1 year
but not more
than 5 years
2% 4%
Debt securities
with ECAI
issue specific
ratings
grade 1 (in relation
to Table A, Table
B, Part 1 of Table
C or Part 1 of Table
E in Schedule 6, or
Table A or Table B
in Schedule 11) and
grades 1 and 2 (in
relation to Part 2 of
Table C or Part 2 of
Table E in
Schedule 6)
(c) more than 5
years
4% 8%
2. (a) not more than 1
year
0.5% 1%
(b) more than 1 year
but not more
than 5 years
2% 4%
Recognized
collateral
which falls
within any of
section 79(e) to
(la) of these
Rules
grade 1 (in relation
to Table A, Table
B, Part 1 of Table
C or Part 1 of Table
E in Schedule 6, or
Table A or Table B
in Schedule 11) and
grades 1 and 2 (in
relation to Part 2 of
Table C or Part 2 of
Table E in
Schedule 6)
(c) more than 5
years
4% 8%
Draft
206
3. (a) not more than 1
year
1% 2%
Debt securities
with ECAI
issue specific
ratings
(b) more than 1 year
but not more
than 5 years
3% 6%
grades 2 and 3 (in
relation to Table A,
Table B, Part 1 of
Table C or Part 1 of
Table E in
Schedule 6, or
Table A or Table B
in Schedule 11) and
grades 3 and 4 (in
relation to Part 2 of
Table C or Part 2 of
Table E in
Schedule 6)
(c) more than 5
years
6% 12%
4. (a) not more than 1
year
1% 2%
Recognized
collateral
which falls
within any of
section 79(e) to
(la) of these
Rules
(b) more than 1 year
but not more
than 5 years
3% 6%
grades 2 and 3 (in
relation to Table A,
Table B, Part 1 of
Table C or Part 1 of
Table E in
Schedule 6, or
Table A or Table B
in Schedule 11) and
grades 3 and 4 (in
relation to Part 2 of
Table C or Part 2 of
Table E in
Schedule 6)
(c) more than 5
years
6% 12%
5. Debt securities
with long-term
ECAI issue
specific ratings
grade 4 All 15% not
applicable
6. Recognized
collateral which
falls within
section 79(e),
(f) or (h) of
these Rules
grade 4 All 15% not
applicable
7. not applicable (a) not more than 1
year
not
applicable
2%
(b) more than 1 year
but not more
than 5 years
not
applicable
6%
Debt securities
without ECAI
issue specific
ratings issued
by banks or
securities (c) more than 5 not 12%
Draft
207
firms, which
satisfy the
criteria set out
in section
79(m) of these
Rules
years
applicable
8. not applicable (a) not more than 1
year
not
applicable
2%
(b) more than 1 year
but not more
than 5 years
not
applicable
6%
Recognized
collateral,
which falls
within section
79(m) of these
Rules (c) more than 5
years
not
applicable
12%”.
(2) Schedule 7, section 2(d) -
Repeal
“section 51”
Substitute
“section 51(1)”.
(3) Schedule 7, section 2(e) -
Repeal
“section 51”
Substitute
“section 51(1)”.
(4) Schedule 7, section 2(f) -
Repeal the full stop
Substitute a semi-colon.
(5) Schedule 7, after section 2(f) -
Add
“(g) ECAI issue specific rating ( ) -
(i) in relation to a debt security issued by a bank, a securities firm, a
corporate incorporated outside India, or any other issuer that is
not a corporate incorporated in India, means a short-term credit
assessment rating or long-term credit assessment rating that is
assigned to the debt security by an ECAI within the meaning of
paragraph (a), (b), (c), (d) or (e) of the definition of external
credit assessment institution in section 2(1) of these Rules, and
is for the time being neither withdrawn nor suspended by that
ECAI; or
(ii) in relation to a debt security issued by a corporate incorporated
in India, means a short-term credit assessment rating or long-
Draft
208
term credit assessment rating that is assigned to the debt security
by an ECAI, and is for the time being neither withdrawn nor
suspended by that ECAI;
(h) long-term ECAI issue specific rating ( ), in relation to a
debt security issued by a sovereign, a sovereign foreign public sector
entity, or a multilateral development bank, means an ECAI issue specific
rating assigned to the debt security by an ECAI within the meaning of
paragraph (a), (b), (c), (d) or (e) of the definition of external credit
assessment institution in section 2(1) of these Rules that is a long-term
credit assessment rating.”.
Draft
209
132. Schedule 8 amended (Credit quality grades for specialized lending)
(1) Schedule 8, column 4 (Fitch Ratings) -
Repeal
“CCC+”.
(2) Schedule 8, column 4 (Fitch Ratings) -
Repeal
“CCC-”.
Draft
210
133. Schedule 9 amended (Requirements to be satisfied for using section 229(1)(a)
of these Rules)
Paragraph (g) -
Repeal subparagraph (ii)
Substitute
“(ii) obliges the institution to repurchase any of the underlying
exposures, at any time, except where -
(A) the obligation arises from a claim arising from a
representation or warranty given by the institution to
another person in the documentation solely in respect of the
status of any underlying exposure at the time of the transfer
and that is capable of being verified at that time; or
(B) the obligation is accepted by and imposed on the institution
for legitimate and sound commercial reasons and does not
expose the institution to excessive credit risk;”.
Draft
211
134. Schedule 10 amended (Requirements to be satisfied for using section 229(1)(b)
of these Rules)
Schedule 10, section 1(b)(i) -
Repeal
“section 51”
Substitute
“section 51(1)”.
Draft
212
135. Schedule 11 amended (Mapping of ECAI issue specific ratings into credit
quality grades under STC(S) approach)
(1) Schedule 11 -
Repeal Table A
Substitute
“TABLE A
LONG-TERM CREDIT QUALITY GRADES
Long-
term
credit
quality
grade
Standard
& Poor's
Ratings
Services
Moody's
Investors
Service
Fitch
Ratings
Rating and
Investment
Information,
Inc.
Japan
Credit
Rating
Agency,
Ltd.
1 AAA
AA+
AA
AA-
Aaa
Aa1
Aa2
Aa3
AAA
AA+
AA
AA-
AAA
AA+
AA
AA-
AAA
AA+
AA
AA-
2 A+
A
A-
A1
A2
A3
A+
A
A-
A+
A
A-
A+
A
A-
3 BBB+
BBB
BBB-
Baa1
Baa2
Baa3
BBB+
BBB
BBB-
BBB+
BBB
BBB-
BBB+
BBB
BBB-
4 BB+
BB
BB-
Ba1
Ba2
Ba3
BB+
BB
BB-
BB+
BB
BB-
BB+
BB
BB-
5 B+
B
B-
CCC+
CCC
CCC-
CC
C
D
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
B+
B
B-
CCC
CC
C
D
B+
B
B-
CCC+
CCC
CCC-
CC
C
B+
B
B-
CCC
CC
C
D”.
Draft
213
(2) Schedule 11 -
Repeal Table B
Substitute
“TABLE B
SHORT-TERM CREDIT QUALITY GRADES
Short-
term
credit
quality
grade
Standard &
Poor's
Ratings
Services
Moody's
Investors
Service
Fitch
Ratings
Rating and
Investment
Information,
Inc.
Japan
Credit
Rating
Agency,
Ltd.
1 A-1+
A-1
P-1 F1+
F1
a-1+
a-1
J-1+
J-1
2 A-2
P-2 F2
a-2 J-2
3 A-3
P-3 F3 a-3 J-3
4 B
B-1
B-2
B-3
C
D
NP B
C
D
b
c
NJ
D”.
Draft
214
136. Schedule 14 amended (Mapping of ECAI issue specific ratings into credit quality
grades under ratings-based method)
(1) Schedule 14 -
Repeal Table A
Substitute
“TABLE A
LONG-TERM CREDIT QUALITY GRADES
Long-
term
credit
quality
grade
Standard
& Poor's
Ratings
Services
Moody's
Investors
Service
Fitch
Ratings
Rating and
Investment
Information,
Inc.
Japan
Credit
Rating
Agency,
Ltd.
1 AAA
AA+
Aaa
Aa1
AAA
AA+
AAA
AA+
AAA
AA+
2 AA
AA-
Aa2
Aa3
AA
AA-
AA
AA-
AA
AA-
3 A+ A1 A+ A+
A+
4 A A2 A A
A
5 A- A3 A- A-
A-
6 BBB+ Baa1 BBB+ BBB+
BBB+
7 BBB Baa2 BBB BBB
BBB
8 BBB- Baa3 BBB- BBB-
BBB-
9 BB+ Ba1 BB+ BB+
BB+
10 BB Ba2 BB BB
BB
11 BB- Ba3 BB- BB-
BB-
12 B+
B
B-
CCC+
CCC
CCC-
B1
B2
B3
Caa1
Caa2
Caa3
B+
B
B-
CCC
CC
C
B+
B
B-
CCC+
CCC
CCC-
B+
B
B-
CCC
CC
C
Draft
215
CC
C
D
Ca
C
D CC
C
D”.
(2) Schedule 14 -
Repeal Table B
Substitute
“TABLE B
SHORT-TERM CREDIT QUALITY GRADES
Short-term
credit
quality
grade
Standard &
Poor's
Ratings
Services
Moody's
Investors
Service
Fitch
Ratings
Rating and
Investment
Information,
Inc.
Japan
Credit
Rating
Agency,
Ltd.
1 A-1+
A-1
P-1 F1+
F1
a-1+
a-1
J-1+
J-1
2 A-2
P-2 F2
a-2 J-2
3 A-3
P-3 F3 a-3 J-3
4 B
B-1
B-2
B-3
C
D
NP B
C
D
b
c
NJ
D”.
Monetary Authority
2011
Draft
216
Explanatory Note
1. These Rules are made by the Monetary Authority under section 98A of the
Banking Ordinance (Cap. 155) and amend the Banking (Capital) Rules (Cap. 155
sub. leg. L) (“the principal Rules”).
2. The principal Rules, which were made in 2006, prescribe the manner in which the
capital adequacy ratio of an authorized institution incorporated in Hong Kong
shall be calculated. The principal Rules have now been in operation for over 4
years.
3. The Rules amend the principal Rules for 4 purposes. They are -
(a) to revise the provisions of the principal Rules relating to external credit
assessment institutions, the risk-weighting scales for such institutions and
the use of credit assessment ratings issued by such institutions. (The
revisions arise, in particular, from recognizing, for the purposes of the
principal Rules, 4 new credit rating agencies as external credit assessment
institutions);
(b) to incorporate into the principal Rules revisions, released by the Basel
Committee on Banking Supervision (“the BCBS”) in July 2009 in its
paper entitled “Revisions to the Basel II market risk framework” and its
paper entitled “Guidelines for computing capital for incremental risk in the
trading book”;
(c) to incorporate into the principal Rules revisions, released by the BCBS in
July 2009 in its paper entitled “Enhancements to the Basel II Framework”,
to the Basel II credit risk capital framework issued by the BCBS in June
2006; and
(d) to incorporate into the principal Rules revisions necessitated by problems
and ambiguities identified by the Monetary Authority in the operation of
the principal Rules to date.
4. The Rules will come into operation on 1 January 2012 (see rule 1).